Most Queensland farming properties have experienced some extreme weather or natural disaster in recent times. What happens if you are forced to sell your livestock ahead of time due to this unplanned event? The tax rate per dollar increases as your taxable income increases so you save tax if you are able to spread the income over several years rather than having it taxed in the year of the sales. The Tax Act has several concessions which allow you to defer the tax when these events happen.
The most common occurrence of a forced sale is where you sell or destroy livestock because your land is compulsorily acquired or resumed under an Act, your pasture or fodder is destroyed by fire, drought or flood or your livestock are compulsorily destroyed under an Australian law for the control of a disease.
Your taxable income in the year of the sale is reduced by the amount of the profit on those sales. This is calculated as the proceeds of the sale or if destroyed the compensation received, less either the cost of the livestock if they were purchased during that year or the average cost as per your trading stock schedule at the start of the year.
You can elect to return this profit as income in two ways. Firstly you can elect to spread the profit in equal instalments over a five-year period included the year of the enforced sale. These are fixed amounts and cannot be varied. The other election is to offset the deferred profit against the cost of any replacement livestock or be included as income to offset against the cost of breeding your replacement livestock. This option is more flexible and can be actioned any time in the preceding five years. Any remaining deferred profit must be included as income in the fifth year after the deferral.
These deferred profits must be taken into consideration each year at tax planning time to ensure they are managed. Certain events like death, bankruptcy, permanently leaving Australia or ceasing to be a primary producer, will force the deferred profits to be income in the year that event occurs.
Overall it's a great tool to use to manage tax liabilities in times of need.
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