Tax time: Considerations in a year when more beef producers will show a profit
01 June 2017
By Ian McLean*, Bush Agribusiness
THE statement below, made by the late Kerry Packer to a parliamentary inquiry in 1991, sums up a lot of people’s attitudes towards paying tax:
"Of course I'm minimising my tax. If anybody in this country doesn't minimise their tax they need their head read. As a government, I can tell you you're not spending it that well that we should be paying extra."
As we progress towards the end of the financial year on 30 June, the issue of paying tax is looming for many beef producers.
For those whose stock numbers and production have not been adversely affected by the drought, the recent high livestock prices will have resulted in a reasonable profit for the year. This good news may be dampened somewhat by the realisation that it will also result in a sizable tax bill.
A brainstorming session, and a rushed meeting with the accountant may result, asking questions like: What can be done to reduce tax? Should we buy another property? How about a new truck and trailer, then load it up with lick and/or fencing gear? Should we hold off selling any more cattle until next financial year?
It is one thing to subscribe to the Kerry Packer school of thought on minimising tax, but it is another to jeopardise long-term wealth creation through short-term tax avoidance driven by poor business decisions.
A key question for producers to ask themselves is why you are in business? Is it to create wealth and financial security for you and your family or is it to not pay tax?
This isn’t a flippant question, as the path to long-term wealth creation is through generating consistent after-tax profits. It is after-tax profits that fund the big-ticket items for the family in the long-term (succession, retirement, education, expansion, intensification and debt reduction).
To get to after-tax profits, a producer must pay tax. Conversely, after-tax profits and long term wealth creation are reduced if the focus is on reducing tax. The tax man only takes 30 cents (or less) in the dollar, so don’t do yourself out of 70 cents to begrudge him 30.
Profits in three of 10 years
A reality for the majority of agricultural businesses is that over a 10 year period, most of the profit will be made in about three of those 10 years, and a lot of cattle businesses are in one of those years at the moment.
The profits made, therefore, need to be used to strengthen the business and put it in the best position for the rest of the cycle. How this is done will be different for each business, but reducing debt and reinvesting in the business to improve profitability, or reduce risk, will be priorities for most.
The problem cited with reducing debt is that debt payments are not tax deductable, and some argue they should be. They shouldn’t - the only way they could be is if the initial amount borrowed were included in your taxable income. In any case, the producer only pays tax on the money used to reduce debt once, and pay interest every year if they don’t pay it off.
Another point often raised is that ‘you are better off paying interest than tax’ which, more often than not, is rubbish. This is only the case if the alternative use of those funds earns a better long-term return than the cost of debt. The majority of pastoral businesses will increase their after-tax profits in the long-term by reducing debt, they will also put themselves in a stronger position to weather future downturns.
In times of good profits like these, investments in the business to improve future performance and reduce risk should be considered. The tax deductibility of the investment however should be secondary to whether it is a good investment in its own right. A cost benefit analysis should be undertaken to compare what the investments return, in total and relative to the amount invested and over what time frame.
If the investment doesn’t stack-up then reducing debt or provisioning for succession or retirement will be a better use of funds, regardless of the tax implications.
A producer can buy a load of fencing gear and fill the bowsers up, but often this just means that once they do it, they have to keep doing it every year to maintain the benefit. Tax-averaging can also reduce this year’s bill, but will result in a higher tax bill than would have otherwise been the case in the leaner years, so it may be better off paying it now while the cash is there.
It is essential to work with good accountants - ones that can advise on effective and legal strategies and structures to manage tax year-to-year, whilst maintaining focus on the main game which is increasing after-tax profits in the long term.
It is important that producers make sure their accountant clearly understands that this is their focus. Many will find this a refreshing change from a focus on reducing this year’s tax bill only.
- No business has ever gone broke paying tax per se, but debt and low profitability has sent a lot to the wall.
- Focus on maximising after-tax profits in the long term, not reducing tax in the short term.
- Work with good accountants and advisors that will advise on effective strategies to build wealth in the long-term
- Most of the profits over 10 years are made in three years, so don’t squander them. They need to be used to strengthen the business to achieve its long-term objectives
- Any reinvestment in the business should be based on a rational assessment of its return in improved performance and/or reduced business risk, rather than its tax deductibility
- Build your financial literacy, so you can understand and improve business performance, rationally allocate capital and have informed, productive discussions with your accountant.
Upcoming Business EDGE workshops
Understanding and improving business performance, allocating capital to fund the long-term needs of the business and performing a cost benefit analysis are just some of the topics covered in the Business EDGE workshop.
The Business EDGE workshop was developed by MLA to grow the business skills and financial literacy of grazing business managers across Australia. Bush AgriBusiness delivers the workshops across northern Australia and has the following workshops scheduled in the coming months:
- Mackay, 13-14 June
- Darwin, 20-21 June
- Roma, 18-19 July
For more information, click here. The workshops come with a full money back guarantee and the workshop cost is fully tax deductable.
* Ian McLean is the principal of business management advisory and training firm, Bush Agribusiness.
This article first appeared in Beef Central.
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