Purpose of the Bill

The Farm Household Support Amendment Bill 2019 (the Bill) amends the Farm Household Support Act 2014 to:

• make permanent the temporary increase in the Farm Household Allowance (FHA) farm assets value limit to $5 million
• remove indexation of the farm assets value limit to movements in the Consumer Price Index (CPI) and
• clarify the treatment of allowable deductions for the purposes of the FHA income test so that farm business deductions apply to farm business income, and off-farm deductions apply to off-farm income.

The change in the farm assets value limit will apply retrospectively to 1 July 2019. The change to the treatment of deductions will apply from the 2019–20 financial year onwards.

The change in the farm assets value limit was a 2019 Liberal-National Coalition election commitment and is based on a recommendation of the February 2019 Independent Review of the Farm Household Allowance.[1]

Background

The FHA is an income support payment which supports eligible farmers and their partners who are experiencing financial hardship. It is paid at the same rate as the social security payment Newstart Allowance (or the same rate as Youth Allowance if the recipient is aged under 22 years).[2] The payment is time-limited: farmers can only receive the payment for up to four cumulative years.[3]

FHA recipients are granted a Health Care Card which enables access to discounted medicines under the Pharmaceutical Benefits Scheme and other concessions. Recipients can also receive a $4,000 activity supplement to pay for approved activities including training or professional advice. Recipients required to have a Farm Financial Assessment can receive a separate supplement worth up to $1,500 to assist with the cost of the assessment.[4] A temporary supplement, the FHA Supplement, was payable to FHA recipients during one or both supplement payments periods: 1 September 2018 to 1 December 2018 and 2 December 2018 to 1 June 2019. The supplement amount for each period was $3,000 each for members of a couple and $3,600 for singles.[5]

The FHA was introduced in 2014 via the Farm Household Support Act 2014 and replaced a number of financial supports offered to farmers during times of drought, in particular, the Exceptional Circumstances Relief Payment. The previous Exceptional Circumstances arrangements had been found to be inequitable and ineffective as they could result in farm businesses being less responsive to drought conditions.[6]

The FHA was designed to support farmers in financial difficulty regardless of the specific cause or whether they were located within a specific drought declared area. It is intended to give farmers ‘breathing space to implement plans and seek training to become financially self-sufficient, so they are better placed to sustain their farming business’.[7]

According to the Department of Agriculture, as at 14 June 2019, more than 11,900 people had received the FHA since it was introduced.[8] There were 6,892 people receiving the FHA as at 14 June 2019.[9]

Estimated actual expenditure appropriated for the FHA in 2018–19 was $163.4 million but this was expected to decrease to $59.7 million in 2019–20 (not including the impact of the measures proposed in the Bill).[10]

The current payment rates for the FHA are set out in Table 1.

Table 1: Farm Household Allowance payment rates

Source: Department of Human Services (DHS), A guide to Australian Government payments: 1 July–19 September 2019, DHS, Canberra, 2019. Other supplementary payments may be payable depending on a recipient’s circumstances, including: Pharmaceutical Allowance, Rent Assistance, Telephone Allowance, Remote Area Allowance and bereavement payments.

The FHA is only one of the Australian Government supports available to farms in difficulty, particularly during drought. Other supports available include the Farm Management Deposits scheme, concessional taxation arrangements, concessional loans, counselling and mental health supports.[11]

Eligibility for the FHA

To be eligible for the FHA, an individual must be a farmer or partner of a farmer and meet residency requirements, income and assets tests as well as mutual obligation requirements. The income and assets tests and mutual obligation requirements are different from those that apply to Newstart Allowance and are designed to allow farmers to remain on their farm (rather than being forced to sell off some or all of their farm assets in order to qualify for support). Certain waiting or preclusion periods may also apply before an eligible recipient can start receiving the FHA.[12]

Income test

To meet the FHA income test, a claimant must have income below the cut-off point for Newstart Allowance or Youth Allowance, whichever applies (the cut-off point is the point at which a person’s Newstart Allowance rate is reduced to zero under the Newstart Allowance income test).[13] The current income test cut-off for a single Newstart Allowance recipient with no children is $1,069.84 per fortnight and for a partnered recipient with no children it is $979.00 (each).[14]

Expenses incurred in deriving business income can be deducted when calculating a person’s assessable income (this can include depreciation on plant or equipment used in producing assessable income).[15]

Currently, some off-farm income may be deducted when calculating total income. Off-farm income is any amount earned, derived or received that was not produced by an activity of the farm enterprise (such as agistment payments, interest payments and rental income). The deduction can only be used where the ordinary farm income from the farm enterprise is less than zero. The deduction only applies to amounts used for off-farm income being used to pay interest on a loan related to the farm enterprise. A maximum of $80,000 of off-farm income can be deducted from assessable income under the income test in this way, if the FHA claimant meets all the applicable requirements for this deduction.[16]

Income from the forced disposal of livestock is exempt for the purposes of the income test provided the FHA recipient invests that income by depositing it in a farm management deposit account (or intends to deposit within 42 days of receiving the payment)—see ‘2019–20 budget measure—forced disposal of livestock’ section of this Bills Digest.

Assets test

There are two parts of the assets test: one applies to non-farm assets and the other to farm assets.

The non-farm and liquid assets test assesses liquid assets, such cash held in bank accounts, term deposits and shares; and non-farm assets such as jewellery, furniture, investment properties, businesses and vehicles. The family home and up to two hectares of land surrounding it (on a single title and used only for domestic purposes) is exempt from the non-farm assets test.[17] Farm assets include land used for the purpose of a farm enterprise, water resources or access rights, livestock, crops, plant or equipment, and, the unpaid portion of a loan used to purchase farm assets.[18]

The combined value of assessable non-farm assets must not exceed the asset limits for Newstart Allowance. The current asset test limits are:

• single homeowner: $263,250
• single non-homeowner: $473,750
• couple homeowner combined: $394,500
• couple non-homeowner combined: $605,000.[19]

The farm assets test assesses the net value of the farm’s assets. Currently, to be eligible for the FHA, the total must not exceed $2,685,000.[20] A temporary increase in the assets limit to $5,000,000 applied from 1 September 2018 to 30 June 2019 (see ‘2018 Temporary Measures Bill’ section of this Bills Digest).[21] The Bill proposes to make this increase permanent and apply retrospectively from 1 July 2019.

In some cases, hardship provisions can apply which allow for some assets to be made exempt from the assets test. This can occur where a person is unable to rearrange their financial affairs, is in severe financial hardship and is unable to sell or borrow against an asset.[22]

Mutual obligation requirements

The mutual obligation requirements for the FHA require a recipient to complete a Farm Financial Assessment and enter into a Financial Improvement Agreement.[23]

The Farm Financial Assessment considers the financial position of the farmer, their partner and the farm. As noted above, up to $1,500 can be provided to help cover the cost of consulting a prescribed advisor to complete the assessment.

The Financial Improvement Agreement is a plan for working towards financial self-reliance and sets out activities to be undertaken to improve the farmer’s financial situation. Activities can include undertaking training or study, obtaining professional advice, seeking or being willing to undertake paid work or any other activities approved by the Department of Agriculture and Water Resources.[24]

2018 Temporary Measures Bill

In August 2018, the Coalition Government introduced and passed the Farm Household Support Amendment (Temporary Measures) Bill 2018 to temporarily increase the farm assets value limit to $5 million from 1 September 2018 to 30 June 2019 and provide for two instalments of the FHA Supplement during the same period.

Then Minister for Agriculture and Water Resources, David Littleproud, stated that ‘these temporary measures are designed to help our farmers in need in the short term while we undertake an independent review of the program’.[25]

2019–20 budget measure—forced disposal of livestock

In the 2019–20 Budget, the Government announced that it would provide $3.1 million over two years from 2018–19 to exempt net income from the forced sale of livestock from the FHA income test, where that income is invested in a Farm Management Deposit.[26]

The measure was implemented via the Farm Household Support (Forced Disposal of Livestock) Minister’s Rules 2019 which modified the definition of income in the Social Security Act 1991. To meet the requirements, the disposal (including killing) of livestock must occur wholly or mainly for one of the following reasons:

• an action by the Australian Government or a state or territory government that has the effect that land or water cannot be used to support the livestock commercially (for example, compulsory acquisition of an estate in land or changing a law governing how land or water may be used), other than an action taken with the farmer’s free consent
• drought or natural disaster affecting the availability of pasture, fodder or water so that the farm could not reasonably support the livestock
• reasonable concern for the welfare of the livestock
• a requirement by or under a law of the Commonwealth, a state or a territory to dispose of the livestock.[27]

An amount received for the forced disposal of livestock must be deposited in a Farm Management Deposit or Centrelink must be notified that it will be deposited within 42 days.[28]

Independent Review of the Farm Household Allowance

The Independent Review was completed in February 2019.[29] The Review Panel was chaired by Michele Lawrence, a dairy farmer and member of the Agriculture Industry Advisory Council.

The Review made six recommendations:

1. decoupling the FHA from the Social Security Act 1991 with the aim of simplifying the application process and tailoring the eligibility settings to farm businesses
2. strengthening mutual obligation requirements to make them more meaningful and enable farmers to plan through current hardships and future business shocks or to leave the industry with dignity
3. refocus the Rural Financial Counselling Service to focus on business coaching
4. improve communications of the FHA’s purpose and requirements
5. distinguish the FHA from drought and promote its broader purpose of supporting farmers during financial hardship irrespective of the cause
6. build in regular assessment of the performance of the scheme.[30]

One of the actions under Recommendation 1 was to maintain the temporary farm asset value limit of $5 million, but also continuing indexation of the limit to movements in the CPI (that is, maintaining its real value in line with inflation).[31]

The Review did not make any recommendations regarding deductions for the purpose of the income test—though it did recommend using existing tax classifications for the purposes of calculating income rather than social security definitions (as part of the Review’s recommendation to decouple the FHA from the Social Security Act 1991).[32]

Committee consideration

Senate Standing Committee for the Selection of Bills

In its second report of 2019, the Senate Selection of Bills Committee deferred consideration of the Bill to its next meeting.[33]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing, the Senate Standing Committee for the Scrutiny of Bills had not considered the Bill.

Policy position of non-government parties/independents

At the time of writing, non-government parties and independents had not stated a position on the measures in the Bill.

Position of major interest groups

At the time of writing, major interest groups had not expressed a position on the Bill.

Financial implications

The change to the farm assets test limit is expected to cost $34.3 million over four years from 2019–20.[34] The Explanatory Memorandum states that there is no additional cost from the changes affecting income test deductions.[35]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[36]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Parliamentary Joint Committee on Human Rights had not considered the Bill.

Key issues and provisions

Implementation of Independent Review’s recommendations

The Bill implements only part of one of the actions associated with the Independent Review’s recommendations: maintaining the $5 million farm asset limit. The Bill runs counter to the Review’s suggestion that the limit continue to be indexed to movements in the Consumer Price Index.

The Review recommended a significant overhaul of the FHA but the Government has not issued a formal response to the Review and is yet to commit to any of the remaining recommendations.

Maintaining the $5 million farm asset limit

Item 1 of Schedule 1 of the Bill repeals and substitutes section 34 of the Farm Household Support Act 2014 to set the farm assets value limit at $5 million. This will mean farmers with farm assets valued up to $5 million will be able to access the FHA, a significantly higher level of farm assets than allowable prior to September 2018.

Numbers affected

In relation to the temporary farm asset limit increase, the Government had advised that an additional 8,000 farmers would become eligible for the FHA.[37] No estimates have been provided as to the number of farmers who will become eligible for the FHA as a result of the permanent increase in the asset limit.

Farm asset limit will decline in real value

Currently, section 34 provides for indexation of the farm assets value limit annually on 1 July according to movements in the CPI. Proposed section 34 does not provide for indexation of the amount and item 3 removes table items 3 and 5 from section 95 to remove the provisions providing for indexation of these amounts under the Social Security Act 1991. This means that the new farm asset limit will not maintain its value in real terms.

Allowable deductions

Item 2 repeals and substitutes section 67 of the Farm Household Support Act to set out new rules for allowable deductions for the purposes of determining a FHA’s claimant’s income.

Current system of allowable deductions

The FHA uses the social security income test—either the income test applicable to benefits such as Newstart Allowance (for people aged 22 years or more) or the income test applicable to Youth Allowance (for those who have not turned 22).[38] The meaning of ordinary income at section 1072 of the Social Security Act 1991 is, for the purposes of calculating a rate of FHA, modified by section 67 of the Farm Household Support Act 2014. Section 67 provides for a person’s ordinary income to be reduced by allowable deductions.

Currently, where a person who is operating a business that is wholly or partly a farm enterprise incurs an allowable deduction, the person’s ordinary income for that tax year can be reduced by ‘so much of the amount as relates to the farm enterprise’.[39] Allowable deductions are set out in the Minister’s Rule and subsection 67(3) provides that the Minister’s Rule may also prescribe a maximum amount for any allowable deductions. Allowable deductions set out in the Minister’s Rule include:

• business expenses incurred while earning taxable income or necessary for the conduct of a business with the purpose of earning taxable income
• depreciation on plant and equipment used or ready to be used in producing assessable income
• interest payable on a loan made on a commercial basis at least one year before making a claim for FHA (where the circumstances of the loan meet certain criteria set out in the Minister’s Rules).[40]

Amendments will link deductions to the relevant income type

Proposed section 67 provides that FHA recipients can claim allowable deductions against relevant income types—on-farm income and off-farm income—up to the value of the income earned in each category.

Proposed subsection 67(2) allows for amounts incurred while carrying on a farm enterprise and prescribed as an allowable deduction to reduce that person’s ordinary income for the tax year by so much as the amount relates to the farm enterprise (and does not exceed the income earned from the farm enterprise). Proposed subsection 67(4) allows for an FHA recipient’s ordinary income to be reduced by amounts that would reduce the ordinary income of a business that is not a farm enterprise under Division 1A of Part 3.10 of the Social Security Act 1991. Reductions under proposed subsection 67(4) cannot exceed the total income earned by the person from the
non-farm business.

Proposed subsection 67(5) will allow the Minister’s Rule to prescribe allowable deductions for the purposes of subsection 67(2) and to prescribe circumstances in which proposed subsections 67(2) and (4) do not apply. Proposed subsection 67(6) will allow the Minister’s Rule to set a maximum amount for any allowable deductions.

The amendments will mean that any allowable deductions are linked to the source of income: either from the person’s farm or from a non-farm business.

Retrospective application

Item 4 provides for the increased farm asset limit to apply from 1 July 2019 and to claims made before the commencement of the amendments. This means that the FHA will be taken to be payable to anyone who makes a claim in the period from 1 July 2019 to the commencement of the amendments, where the only reason it would not have been payable was because their farm assets were greater than $2.685 million but below $5 million.

Item 5 provides for the amendments relating to allowable deductions to apply for the 2019–20 tax year onwards.