Institute of Chartered Accountants Australia

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1 Agricultural Competitiveness White Paper - Submission IP599 Institute of Chartered Accountants Australia Submitted 17 Apri l April2014 Institute of Chartered Accountants Australia Agricultural Competitiveness Taskforce Department of the Prime Minister and Cabinet PO Box 6500 CANBERRA ACT 2600 By agricultural.competitiveness@pmc.gov.au Dear Taskforce Members, Agricultural Competitiveness Issues Paper The Institute of Chartered Accountants Australia (Institute) welcomes the opportunity to provide a submission on the Agricultural Competitiveness Issues Paper (the Issues Paper). Appendix A includes more information about the Institute. Customer Service Centre NSW 33 Erskine Streel Sydney NSW 2000 GPO Box9985 Sydney NSW 2001 Key points In order to attract the next generation of farmers into agriculture the barriers to entry need to be reduced. Measures to encourage splitting the farm assets, namely real estate, from the farm business would attract new investment and new entrants to agriculture. Leasing of agricultural land has been under utilised in Australia compared with other countries such as the United Kingdom and United States. This may be a cultural issue with Australian 's having a preference for land ownership. However, increasing agricultural land under leasehold would be an opportunity for growth. The Tax Zone Rebate should be reviewed to ensure it reflects a current day definition of remoteness and acts as an incentive to attract workers to remote areas. Extending the existing Livestock Profit Deferral Allowance to cropping farmers may assist with cash flow when farmers are subject to crop failure due to extreme weather events. This would allow more flexibility than the current Farm Management Deposit system. Should you have any queries concerning the matters discussed above or wish to discuss them in further detail, please contact me ACT L10, 60 Marcus Clarke Street Canberra ACT 2601 Canberra ACT t Qld L32, Central Plaza One, 345 Queen Street, Brisbane Old 4000 Brisbane Old 4001 Pl1one 6' SA/NT l29, 91 King Willia m Street Adelaide SA 5000 Adelaide SA 5001 Fa x Vlc/Tas L3, 600 Bourke Street Melbourne Vic 3000 Melbourne Vic 3001 PItone Fa x Yours sincerely, t WA L11, 2 Mill Stree t Penh WA SOOO Perth WA 684B Rob Ward Head of Leadership & Advocacy charteredaccountants.com.au The Institute of Chartered Accountants in Australia. Incorporated in Austru~a Members' Liabil ty Limited. ABN

2 Institute of Chartered Accountants Australia's Submission on Agricultural Competitiveness Issues Paper The following addresses some of the questions raised in the Issues Paper. It does not address all of the questions raised. Issue One Ensuring food security in Australia and globally a. Opportunities for expansion Improving production through better use of technology is the key to expansion, however, this is complex because it requires greater investment than is occurring at present. Many farms are not operating at their productive potential. This is due to a number of reasons including financial constraints, environmental constraints and lack of management capability and/or confidence. There is potential to increase the intensity of certain production systems, however this needs to be balanced with the cost and complexity as well as having regard to environmental issues. Programs such as Soils for Life are considering options for increasing productivity in a sustainable way. Issue Two Farmer decisions for improving farm gate returns a. What are the drivers and constraints to farmers adopting alternative business structures, innovations or practices that will assist them in improving farm-gate returns? Drivers for change include the perceived cost-benefit of making the investment along with changing practices. Like any other business manager, farmers are driven by expected financial return with some being leadecs in innovation while others are late adopters of technology. Greater investment in industry-wide research and development should also assist with driving change. b. What tools. skills and advice do farmers need to effectively adapt and respond to the risks they face? Farmers need to be better equipped with budgeting, forecasting and planning tools, especially in relation to adapting and responding to risks and the use of insurance products to mitigate risk e.g. crop protection insurance. Farm businesses also need to obtain advice from external professionals such as accountants to assist with business risks as well as other specialists such as agronomists who may help to manage pest and disease risks, and assist with the allocation of inputs such as chemicals, fertiliser and seed. With technology being vital to improving farm gate returns improved skills are required in the areas of technology adoption. c. How can new farmers be attracted to agriculture and how can they succeed? Agriculture has a large barrier to entry being the large initial investment required to acquire land. Lease opportunities are limited as culturally Australians have preferred property ownership. Contributing the lack of properties available to lease, retiring farmers with no on-farm successors) usually see their only option as selling because of concerns they have about lessees ability to keep the asset in reasonable shape i.e. avoiding weed infestation and deterioration of infrastructure. Despite the opportunities that agriculture may offer in the coming decades with growing markets in Asia, there is still a concern amongst newer farmers that the long-term financial outlook is weak.

3 Issue Three - Enhancing access to finance a. How do we better attract private capital into farm investment? A distinction needs to be made for investors between the land asset and farm business. The return on land assets will predominantly depend upon the valuation of the land and the potential for capital gains. Much publicity has been given to the inflated prices of rural land, and some suggest that land values need to come back significantly, however this varies between industries and regions. Most investors in commercial property will look for capital growth in the value of the asset. Starting from a point of high values is not attractive for investors. The risk-return relationship for investors in farm businesses is different compared with other business investments due to the number of risks such as climate and extreme weather events, availability of finance, commodity prices and exchange risk. These risks may appear insurmountable for investors that are not familiar with the sector. Investors will also look for scale w ith investments. Smaller land-holdings may need to be consolidated into economical units that will attract private equity investment in an efficient way. b. What examples are there of innovative financing models that could be used across the industry? Generally the financing models currently available from financial institutions are adequate. The introduction of the Personal Property Securities (PPS) legislation has made it easier to secure assets subject to finance arrangements. Although some farmers have had difficulty obtaining finance for livestock using stock mortgages and livestock leases given the constitution of herds/flocks change frequently. Other structures such as share-farming, lack sophistication in terms of having a consistent approach that farmers can understand and easily apply. Certain businesses have been successful with structuring different models to suit different circumstances. This includes offering different levels of management services for landowners e.g. partial through to full management services for landowners. c. What alternative business structures could be developed for farming that also retain ownership with farm families? Leases are probably the most likely structure to put in place for families to maintain ownership of the land asset, while someone else takes on the business. However, sufficient scale is needed to attract lessees. Lessors also need to have the re-assurance that their asset will be well maintained. Certain existing structures are prohibitive. For example corporate structures are not ideal, other than for large-scale operations, due to capital gains tax implications associated with changes to asset values. Discretionary trusts can be problematic due to their 80-year life span in all State jurisdictions other than South Australia. Issue Six - Improving the competitiveness of inputs to the supply chain a. How can we attract workers to agriculture- particularly in remote areas? The income tax law currently provides for a zone tax offset. The original policy thinking behind the offset was to recognise the disadvantages which individual taxpayers endure because of the uncongenial climatic conditions, isolation and high cost of living in remote areas. 3

4 The zone tax offset goes to the individual, not to business owners, and its value has declined over recent years due to non-indexation. Eligible remote areas are classed as either Zone A or Zone B, and there are special areas within these zones. The tax entitlements for Zone A (which covers more inhospitable climatic areas with higher costs of living) exceed those for Zone B. The Institute supports the policy behind the zone tax offset, but recommends a review of the design which could include replacement of the offset with a transfer (cash) payment mechanism. The switch to a direct payment acknowledges the tax simplification process already underway as part of the government's plans to reduce red tape, and the A TO's project to relieve most individual taxpayers of the obligation to lodge an annual income tax return. This review of the current zone tax offset should consider: Whether the offset (or equivalent payment) provides reasonable acknowledgement of the additional cost of living in remote Australia. The introduction of indexation arrangements. Whether the offset (or equivalent payment) should be structured to support more permanent migration, with greater benefits obtained by those who physically reside in the remote location for longer periods (as distinct from the current 183 days in the income year test). The measurement of zones to ensure they are based on a contemporary measure of remoteness (this would include a regular review of population data). Australia's Future Tax System Review (the Henry Review) found that: 'The zones were established in 1945 and the boundaries have remained broadly unchanged since Given changes in population and the distribution of industry and transport infrastructure since 1956, many areas in the zones are not disadvantaged or isolated. On the other hand some remote areas fall outside the zones. For example while Darwin is in Zone A and Townsville and Cairns are in Zone 8, Ivanhoe, in western New South Wales, with a population of around 250 and more than 200 kilometres from the nearest town with over people, lies outside the zones'. The current definition of 'remote' would encompass many regional centres that are not remote by modern standards. Some towns that are genuinely remote are not included in any zone area. In addition, as well as the zones having been defined in 1956, the special areas are based on 1981 census figures and so do not reflect Australia's current population profile. ATO and taxpayer compliance costs (refer Taxation Ruling 94/27 for an illustration of the problems in applying the current law relating to the zone tax offset). Issue Nine- Assessing the effectiveness of incentives for investment and job creation General comments - tax concessions Consideration could be given to extending the five year Livestock Profit Deferral Allowance to cropping farmers. At present dry land croppers are subject to lumpiness of revenue depending on the success of their crops each year. Extending the allowance would even out revenue and assist cash flow. It would result in cash not being locked up as is the case with Farm Management Deposits. 4

5 Appendix A About the Institute The Institute represents accounting and business professionals in Australia and around the globe. Members strive to uphold financial integrity through a commitment to ethics and acting in the public interest. We focus on educating candidates through the Chartered Accountants Program and engage in advocacy and thought leadership underpinned by our members' knowledge and experience. We influence a range of policy areas impacting the Australian economy and domestic and international capital markets. A watershed member vote in 2013 set the course for the Institute to amalgamate with the New Zealand Institute of Chartered Accountants( subject to obtaining formal government approvals and effecting amendments to constituent documents), with the vision of becoming the trusted leaders in business and finance. The proposed new institute - Chartered Accountants Australia and New Zealand - is expected to have more than 90,000 members in total with 17,000-plus candidates, giving us greater scale and influence on the world stage. We are on the Board of the International Federation of Accountants, and are connected globally through the 800,000-strong GAA and Chartered Accountants Worldwide which brings together leading Institutes in Australia, England and Wales, Ireland, New Zealand, Scotland and South Africa to support and promote over 320,000 Chartered Accountants in more than 180 countries. charteredaccountants.com.au 5