Last week's Mind Your Business column, by Ken Solly, touched on the time value of money.
This got me thinking about decisions many farmers make through a short-term lens - one example is minimising tax.
For some people, this seems to be a major focus, and sometimes choices are made in isolation that end up being to the detriment of the farming business as a whole.
We have all seen the pile of posts or troughs purchased in a pre-30 June rush to increase deductible expense for that year, and therefore decrease taxable income.
There is a risk those same items stay out the back of the shed for years before they find themselves out in the paddock and productive.
It's fair to say the capital could be deployed in better ways than this.
Farmers have access to various methods of smoothing out income - two that come to mind are income averaging and farm management deposits.
FMDs are indeed a good tool to manage taxable income but you need to be aware the money needs to come out at some point and is classified as taxable income when it does.
This is fine, if advice has been sought or the farming business owner has a strategy of how to manage this in the long-term.
Minimising taxable income may impact the business' ability to borrow funds. Banks are scrutinising serviceability like never before. This is mainly driven by legislative changes after the banking royal commission.
Interest rates have a material impact on serviceability of loans. I recently heard interest rates are sitting at the 10-year average and are lower than the 20-year average.
This suggests current rates aren't that high. Although, as we all know, the elephant in the room is the quantum of debt that farming businesses have and the price of land and machinery and more.
Paying back loan principal - while not tax deductible - is a way to reduce your loan balances and increase your borrowing capacity over time.
In my work, I am quite often adding back capital costs that have been expensed, to show banks what is year-in-year-out expenditure and what is capital in nature.
This was much more prevalent when the instant asset write-off regime was about.
Demonstrating the ability to pay back loans is vital, particularly for those farming businesses looking to expand.
This takes a lot of forward planning and is where having a long-term plan is crucial.
Upping the professionalism of farming businesses is a key plank in the growth and development of the sector.
This can be in-house, but is normally with the assistance of outside professionals, particularly where specific advice is required.
Circling back to tax. I know of a few farming businesses that certainly do minimise their tax and then just pay what's due, and invest their after-tax income however they want.
Taking this route expends much less time and energy than trying to lower tax at all costs. It's an individual businesses choice.
