Grain marketing and tax planning are more intertwined than we think.
It may appear strange to raise the topic of grain marketing when the crop is only just in the ground.
However, although budgets have been completed and some serious numbers entered on returns per tonne – until the grain is in the bin it’s only an estimate.
How you market your grain has a big impact on your cash flow and your tax position – the options of cash contracts, pools, swaps, and futures all have different tax outcomes and considerations on your taxable income from one year to the next.
Cash contracts, which have become the norm in the last few years, are generally understood and the cash is accounted for when received on the grain sales.
If on a deferred contract, you still have control over the product – for example, unnominated in load net, the delivery has not occurred, the grain is accounted for as closing stock at the end of the year.
However, if you have delivered and the grain is not under the grower's control, the deferred contract is a debtor to your tax position at the end of the year – something you may need to discuss with your accountant.
It's ‘back to the future’ with pools, albeit with a few tweaks.
Talking to some younger clients this week, they weren’t aware of the old ‘pool system’ as we knew it before deregulation.
The options of types of pools, both in timing and quantity is staggering.
The flexi-starter with CBH for example offers the grower the flexibility to manage some production risk while still accessing greater marketing opportunities.
Pools offer differing cash payments – the advanced pools give most of your taxable income in the year of delivery – approx. 80%, whereas the distribution or the more traditional pools give the number of distributions, usually 4, straddling the two financial years with closer to only 60% of the income in the year of delivery.
The deferred pool offers the option of effectively moving the whole of the income into the next financial year – the first payment in July, as it has been delivered, but the value unknown, there is no closing value of stock on hand at the end of the year.
Many clients have accessed the use of derivatives favouring swaps latterly which unfortunately this year has left many out of the money.
Closing out of the swaps early – rather than waiting for harvest and offsetting with a physical price and delivery is not uncommon this year and has brought about a crystalised taxable loss for this financial year - again impacting the total taxable income of the trading entity.
Futures are not as commonly used although we are seeing more activity in this area again but around hedging weather, rather than the commodity itself. Depending on when closing out of positions occurs, this too will impact the bottom line.
It’s worthy of consideration when doing your final tax planning to discuss with your accountant how you are managing your marketing of the grain and the tax implications from one year to the next.
If you would like to learn more about grain marketing and tax planning, please contact your local RSM advisor today.