Farmers have been urged to carefully consider the implications of the recently increased accelerated depreciation rate to write off new machinery, before committing themselves to that option.

The new 200 per cent rate means that farmers have the choice of writing a machine off at double the rate of the traditional prime cost method, or using the straight line method.

Once committed to a particular method of depreciation for each item, there is no option of reverting to the other.

NSW Department of Primary Industries economist, Lloyd Davies, said increasing the accelerated depreciation allowances from 150 to 200pc would make it more tempting for people to change over machinery more often.

For example, the accompanying table shows yearly write offs for depreciation using both methods, where a $100,000 implement is purchased on July 1, 2006 and has an eight year life expectancy.

"If your tax rate is constant, then the overall tax deductions over the life of the machine will not be any different under either system of depreciation," Mr Davies said.

"The advantage with the 200pc method is that you get the bulk of the tax deductions earlier, but it takes a lot longer to have an expensive machine written off completely.

"If your tax rate is expected to increase in the next couple of years, the prime cost method of depreciation becomes more attractive."

If a big year in the current financial year was anticipated and a decision was made to buy some machinery to help reduce the tax burden, the machinery could only be depreciated in the first year for the portion of the year it was owned, according to Mr Davies.

"This means that to gain significant deductions, the earlier you can anticipate a big year the better," he said.

Mr Davies offered a word of caution to farmers carrying forward losses during the drought.

"The taxation impact of a machinery purchase on these farms will not show until accumulated losses are exhausted and taxes are again being paid," he said.

"It is also very important to only buy things that can generate more income than the costs involved, or save costs.

"Investment in items just to save tax is a trap that farmers have fallen for many times in the past, so do the sums first.

"For small holdings that often have low marginal tax rates, using a contractor or sharing machinery between others often makes better business sense."

Example of depreciation 'prime cost' method.
Machine life eight years or depreciation at 12.5 per cent per year

Example of 200 per cent 'accelerated depreciation', i.e. 25pc on diminishing balance

Depreciation continues until written down value is $300

Producer tax info

Information about taxation arrangements for primary producers is available from the Australian Taxation Office (ATO) website by following these steps:

1. Access the ATO website www.ato.gov.au
2. On the top right of the screen do a search of all ATO websites except legal databases for 1712. This is the fact sheet number for the 2005-2006 issue of Information for Primary Producers.
3. Click on this link and it will lead to another link that opens a 12 page PDF document with a good summary of primary producer taxation features such as averaging and accelerated depreciation valuing livestock. More recent changes include special provisions for water facilities, tradeable water rights and carbon sequestration rights.
4. If the PDF version is not selected, there are alternative links on the left side of the screen that can provide detailed business information on all topics relevant to primary producers.

Contact Lloyd Davies, Paterson, (02) 4939 8947.