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Primary Production

Averaging of income

Eligibility for averaging

An eligible primary producer may be:
  • an individual

  • a partner

  • a trustee
    provided that the main or sole purpose is carrying on the business of primary production for a period of at least 2 years – s.392-10

Tax offset

  • occurs when taxable income exceeds average income

  • calculated as the difference between tax on taxable income at ordinary tax rates and tax on taxable income at the average tax rate

Calculation of average income

Average income is calculated by dividing the sum of taxable incomes of the years from and including the first eligible year for averaging purposes by the number of years (but to a maximum of 5 years) – s.392-40

Averaging component

Where a primary producer derives both primary production income (PPY) and non-primary production income (non-PPY),
then the averaging scheme applies only to the taxpayer's averaging component – s.392-90

Definition

Primary production income

For tax purposes income from primary production includes the following receipts:
  • proceeds from the sale of produce
    e.g. grains, fruit, nuts, meat, eggs, vegetables, wool, skins, timber

  • proceeds from the sale of livestock

  • stud fees, prize monies

  • insurance recoveries for loss of profits

  • agistment fees

  • value of primary produce taken by the owner for domestic use

Averaging of income

Often a primary producer’s income may vary greatly from year to year due to seasonal, climatic factors or commodity prices

Averaging provisions ensure that taxpayers who are engaged in the business of primary production, do not pay greater tax over a number of years than those taxpayers on comparable but non-fluctuating incomes

Averaging involves the granting to the taxpayer of a tax offset or imposition of extra income tax in the calculation of tax payable

Extra income tax

  • occurs when taxable income is less than average income

  • also calculated as the difference between tax on taxable income at ordinary tax rates and tax on taxable income at the average tax rate

Averaging of income

Averaging will not apply where the taxpayer's taxable income in the first year of primary production is greater than taxable income in the second year – s.392-10

A year in which a loss occurs is counted as a NIL amount in the calculation of average income - s.392-15
The loss can be carried forward for deduction in a following year(s)

Averaging component

The Averaging Component is calculated as follows:
  • Averaging component consists of all the taxable income where the taxpayer's non-PPY is less than $5,000

  • If non-PPY is between $5,000 and $10,000, then the averaging component consists of all PPY plus an allowance of $5,000 reduced by $1 for every $1 by which the non-PPY exceeds $5,000

  • If non-PPY is greater than $10,000, then only the PPY comprises the averaging component