Farm Management Deposits Scheme
Entities audited: Department of Agriculture
Australian Taxation Office
Department of the Treasury
Introduction
8.1
The Farm Management Deposits (FMD) Scheme was established in 1999 as a mechanism to assist primary producers in dealing more effectively with fluctuations in cash flow and encourage increased financial self-reliance.
8.2
The FMD Scheme enables primary producers to defer and potentially reduce their income tax liability by depositing specific amounts into FMD accounts at authorised institutions. By making deposits that qualify as ‘deductible’, a primary producer’s annual taxable income may be reduced. Amounts withdrawn from an FMD account are included in the assessable income for the year in which they are withdrawn.
8.3
Under the FMD Scheme, account balances have increased steadily over time. Account balances indicate a pattern of deposits made prior to the end of the financial year and withdrawals made shortly after the commencement of a new financial year. The Australian National Audit Office (ANAO) reports that, as of June 2018, over $6.6 billion was held in FMD accounts held by approximately 45 000 Scheme participants.
8.4
Policy changes were introduced to the FMD Scheme on 1 July 2016 as part of the Australian Government’s Agricultural Competitiveness White Paper. Changes introduced included:
An increase in the deposit limit for FMD accounts for each account holder, from $400 000 to $800 000;
Enabling primary producers experiencing severe drought conditions to access FMDs within 12 months of deposit without losing the tax concession; and
Enabling FMDs to be used to offset loans or other debts relating to the primary producer’s business.
8.5
Three agencies have shared responsibility for the FMD Scheme: the Department of Agriculture (Agriculture) is the policy owner of the FMD Scheme; the Australian Taxation Office (ATO) manages the administration of the tax legislation; and the Department of the Treasury (Treasury) is responsible for the FMD Scheme’s tax policy and preparing expenditure estimates.
Audit Scope
8.6
The ANAO undertook the audit in order to ascertain whether the FMD Scheme was being administered effectively. The audit was undertaken in the context of a significant increase in the estimate of revenue forgone for the Scheme in the 2017-18 financial year and the increased scope of the Scheme as a result of the policy changes in 2016.
8.7
The ANAO previously conducted an audit of the administration of the FMD Scheme in 2003, examining the roles that Agriculture and the ATO had played in the management and delivery of the Agriculture – Advancing Australia package.
8.8
The stated objective of the ANAO audit was to examine whether the ATO and Agriculture have effectively administered the FMD Scheme. The ANAO adopted two criteria in assessing this objective:
Whether advice on the 2016 policy changes was provided on a sound basis to help achieve the Scheme’s objectives; and
Whether effective risk identification and compliance arrangements are in place to support the integrity of the Scheme.
8.9
The audit methodology included reviewing advice and briefing materials, analysis of FMD data provided by financial institutions to the relevant agencies, and interviews with responsible staff and registered tax agents. The audit cost approximately $315 000 and utilised three ANAO officers.
Overall Audit Conclusion
8.10
The ANAO found that the administration of the FMD overall had ‘not been fully effective’ and noted that take up rates of the three policy measures had been low.
8.11
The also audit found that the advice provided to the Government in relation to the 2016 policy changes were largely sound. The ANAO report, however, indicated that advice was limited in relation to the extent to which the changes proposed by the Minister under the White Paper process would assist in achieving the FMD schemes objectives. The ANAO report outlined that the proposals were not assessed for whether there was a strong case for change, and the rationale for policy changes was unclear.
8.12
The ANAO found that risk identification and compliance arrangements to support the Scheme have ‘not been fully effective’. The ATO’s compliance arrangements for the FMD Scheme were found to be informed by its own assessment that the risks to revenue were relatively low, in addition to its general approach to small business risks. The ANAO expressed concern that the ATO had not ‘fully captured key elements of the Scheme’s design’.
8.13
Four recommendations were made in the report, addressed to both Agriculture and the ATO. One recommendation related to Agriculture’s planned evaluation of the FMD Scheme. The second recommendation related to more comprehensive risk assessments. The remaining two recommendations related to the quality of data and its use in data matching to support compliance. All recommendations were agreed to by the relevant agencies.
Governance
8.14
The provision of sound advice is a critical component of the management of policy programs. In the case of making changes to existing programs, advice should specifically address whether the proposed changes will assist in achieving the policy’s core objective and how this will occur.
8.15
On 1 July 2016, three key policy changes to the Scheme were introduced. These changes were developed as part of the Agricultural Competitiveness White Paper process, undertaken over a three-year period between August 2013 and July 2016 by a taskforce within the Department of the Prime Minister and Cabinet with input from officials in Treasury and Agriculture. The proposal to increase the deposit limit for FMD accounts and the re-establishment of early access provisions during periods of drought were included in the Green Paper, while the proposal to enable FMDs to offset business loans was introduced in an earlier Green Paper and Issues Paper.
8.16
The three proposed changes were presented for decision by the Government in April 2015. The audit found that the accompanying advice for the proposals included detail such as the financial and budget implications, an assessment of the policy case, and assessments of the regulatory impact and potential risks. The ANAO, however, highlighted two areas where advice could have been improved:
There was no clear rationale or options provided in relation to increasing the deposit limit, particularly in relation to doubling the size of the deposit cap; and
There was no evidence that public consultation was conducted in relation to the loan offset proposal prior being presented to Government. Public consultation was conducted after Treasury had released the draft legislation. While many stakeholders expressed support for the loan offset proposal, there was criticism by consulted parties in relation to the FMD Scheme changes which had not been raised in the Green Paper released previously.
8.17
The ANAO made a recommendation to Agriculture that it include in its intended review of the Scheme a focus on the extent to which the policy is achieving its intended purpose. In response, the Secretary explained to the ANAO:
The department will ensure that the evaluation asks specific questions to flesh out answers to ‘how well is the scheme meeting its defined policy objectives?’ and ‘how well is the scheme being administered?’ The department will also expand the evaluation to cover other stakeholders the ANAO was not able to canvas, including the Authorised Deposit-taking Institutions providing FMD accounts for farmers. This will allow for better insights into the impact of the Scheme on all stakeholders and the true cost of providing the Scheme.
8.18
Agriculture officials further explained that the audit’s findings were being considered in the context of drafting questions for the evaluation process, which is expected to be completed by June 2021. The Scheme evaluation will cover a broad range of aspects, including: the Scheme’s effect on primary producers’ businesses; the interaction and overlap of the FMD Scheme with other tax measures; whether the Scheme is currently fit for purpose in meeting the policy’s objective; and the uptake of the Scheme.
Risk Management
8.19
As part of the FMD Scheme’s operations, Agriculture and the ATO share responsibility for managing potential risk. In December 2004 Agriculture prepared a risk assessment in consultation with the ATO. The risk assessment established that Agriculture was the policy owner, the ATO held responsibility for the administration of the program relating to tax legislation, and both entities held responsibility in identifying the risks unique to their area of responsibility. The joint risk assessment was reviewed in 2012 by Agriculture, but the ANAO could find no evidence of the review being formally approved by both entities.
8.20
The ATO and Agriculture agreed to undertake a joint risk assessment process but repeatedly deferred on action, finally agreeing in October 2017 not to pursue a new assessment until data sharing and data integrity issues were resolved. In addition, in April 2018 both entities agreed not to renew the latest memorandum of understanding and instead signed a letter of understanding in November 2018 outlining shared objectives and key activities.
8.21
The ANAO expressed concern regarding the lack of progress on a new risk assessment. It highlighted the risks involved for Agriculture in particular, and stated:
As the policy owner of the FMD Scheme, it is important that Agriculture informs itself of key risks to the Scheme, including compliance risks so that it can take or recommend appropriate action to improve the administration of the Scheme. This will support its responsibility for ensuring the effective and efficient implementation of agricultural policies, including when there is joint provision of services with other government entities.
8.22
Recommendation 2 of the ANAO’s report stipulated that Agriculture should complete an ‘overarching risk assessment for the Scheme that includes issues raised in this audit, with the [ATO] providing input on tax risks’. Recommendation 2 also provided that the two entities work collaboratively and in a timely way to resolve issues such as data sharing and integrity.
8.23
Agriculture advised that they are currently preparing work on an overarching risk assessment. The ATO advised that it is similarly conducting an overview of its small business risk assessment which incorporates the FMD Scheme. Following the completion of the ATO’s review, Agriculture will use ATO information to inform its own risk assessment of the program as a whole. The expected time of completion of the overarching risk assessment is 30 June 2020.
Compliance Risks
8.24
In administering the FMD Scheme, the ATO assesses and reviews the potential for compliance risk in relation to the tax system. In a risk assessment conducted in 2010, the ATO identified two main compliance risks:
Individual taxpayers understating their taxable income, such as ‘failing to return income when deposits are withdrawn from the scheme thus avoiding tax’; and/or
Individual taxpayers incorrectly claiming a tax deduction during the time that deposits are made into a Scheme-approved account, which results in a timing or marginal tax benefit.
8.25
The ATO’s risk assessment concluded that the risk rating was ‘low’ for the FMD Scheme, a finding which was disputed by the ANAO. The ANAO argued that the assessment was limited by scope and did not consider a ‘large number of the Scheme’s eligibility and operational requirements’.
8.26
At the hearing, ATO officials explained why they assessed the Scheme as ‘low’ risk:
We view the risk as low risk in the context of the compliance risks that we manage … in terms of controls on this risk relative to its low severity we have a range in place. We always start with prevention, help and assistance to help people understand the rules right … our risk models do draw on the data when we’re looking for omitted income, overclaimed productions and unexplained wealth. And what we see consistently is that this issue does not come up through that risk modelling.
8.27
The ATO also undertook a desk-based analysis of a sample of approximately 300 FMD account holders to assess compliance with Scheme rules. It found that approximately five per cent of the sample ‘showed an indication of potential risk and advised that further analysis (for example, taxpayer contact) would likely reduce this to lower levels’. The ATO viewed this analysis as an indication that the risk rating remained unchanged from the ‘low’ rating assigned to the Scheme in 2010. The ATO also confirmed that there had been no breaches of compliance found in the Scheme’s history. However, the ANAO found that the ATO’s analysis highlighted significant problems with the FMD Scheme regarding the quality of data, and did not effectively demonstrate whether the risk level had changed.
8.28
The ANAO recommended that Agriculture complete an ‘overarching risk assessment … that includes issues raised in [the] audit, with the Australian Tax Office providing input on tax risks’. This recommendation was accepted by both entities, and it was advised that this would be integrated into the general risk assessment to be released in 2020.
8.29
The Auditor-General further commented in the hearing on the agencies’ differing views of risk and compliance assessment:
We come up in a number of audits where you have a partnering arrangement with doing something, particularly shared-service-type activities where Tax look at it from their broad risk perspective, which is big. Their description of how they’re managing the risk sounds right for the entity. The program is being run in Agriculture and the dollars for them are big, not small. If this was being run all out of [A]griculture and you were looking at the risk profile, you would probably see a lot more activity going on than you see in [T]ax. When you do the audit, who’s right? Is it the big whole-of-government perspective risk perspective or the small entity risk perspective?
Performance Measurement and Management
Overall Performance Measurement of the FMD Scheme
8.30
The policy intent of the FMD Scheme is ‘to encourage increased financial self-reliance among primary producers by allowing them to set aside cash reserves earned during high-income years, for use in low-income years’.
8.31
Further, the ANAO report noted that ‘the ATO was unable to provide any instances where reviews or audits had addressed issues of potential non-compliance with FMD Scheme requirements. The ATO therefore was unable to demonstrate that any FMD holder has been subject to formal action in relation to their FMD deductions or repayments or other aspects of the Scheme’.
8.32
Agriculture outlined how it used data collected through farm surveys and characteristics of FMD Scheme account holders to examine whether the policy was achieving its objective:
Superior financial performance is, according to [the Australian Bureau of Agricultural and Resource Economics and Sciences], the key characteristic, in fact, of primary producers that do have farm management deposit holdings. What that means … is that they have higher cash incomes, they have greater rates of return and they have higher farm equity ratios—and this is relative to other farms of similar size and other enterprises that are often of a similar nature.
8.33
Agriculture’s planned evaluation of the FMD Scheme will incorporate questions in relation to the extent to which the Scheme is achieving its policy objectives. The ANAO, however, expressed concern that the evaluation would not specifically address the extent to which the policy was achieving its stated outcomes. The ANAO stated:
Despite its broad objectives, the planned evaluation does not explicitly consider how the FMD Scheme assists primary producers to become more financially self-reliant – the policy intent of the Scheme. The relationship between the holdings of FMDs and other forms of government assistance would be a useful line of enquiry, especially with the higher deposit limit now operating.
8.34
The ANAO issued a recommendation in its audit report suggesting that, in its impending evaluation of the FMD Scheme, Agriculture should have explicit questions that focus on ‘the extent to which the Scheme assists primary producers to become more financially self-reliant’. Further, it recommended that the findings be included in the evaluation report and used to draw implications for the Scheme’s administration and other policies relating to financial support to primary producers. Agriculture agreed to this recommendation.
Performance Measurement of the 2016 Policy Changes
8.35
In examining the implementation of the 2016 policy changes, the ANAO identified two key areas of concern: the methods in which performance was measured, and the results identified by the ATO and Agriculture.
Measurement Methods
8.36
Performance measurement of the Scheme is conducted through two main avenues: data provided by the ATO, and farming surveys. Firstly, Agriculture uses ATO data to examine the performance of the Scheme. Measurement tools used by the ATO include:
Requiring financial institutions offering FMD accounts to report the balances in holders’ accounts annually to the ATO;
Examination of FMD Scheme users’ tax returns to determine whether early withdrawals were utilised due to drought or natural disaster; and
Requiring financial institutions to provide information to the ATO regarding whether loan offset arrangements have been established by an account holder for that particular institution in their Annual Investment Income Report.
8.37
The ANAO found that in implementing the 2016 policy changes, the agencies involved established mechanisms of ‘variable reliability’ to monitor the uptake of the new features of the Scheme. It observed that the methods of data collection utilised by the ATO were reliant on information provided by taxpayers or financial institutions and therefore were not verifiable without directly consulting with taxpayers or financial institutions. Agriculture has only compared holdings within particular financial institutions not across financial institutions, making this data limited in value.
8.38
In a second performance measure, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) conducts annual surveys of various farming sectors, the results of which are used by Agriculture to monitor the opening and closuring of FMD accounts. The surveys request information such as the use of offset loan accounts, withdrawals under early access arrangements and balances of FMD accounts. These surveys are completed by primary producers, with sample sizes numbering at approximately 4 000 participants. The ANAO expressed no concerns regarding the use of the ABARES’ studies to measure performance.
8.39
Both measurement tools are problematic in assessing the FMD Scheme’s performance for three key reasons. Firstly, as detailed above, the ATO’s data is highly reliant on the provision of information by individuals and financial institutions to the ATO and is not verifiable without contacting these stakeholders. Secondly, both the ATO data and the ABARES studies use forms of self-reporting and self-assessment by primary producers. It is not clear to what extent surveys involving self-reporting are reliable forms of performance measurement.
8.40
Thirdly, FMD Scheme accounts can be used for a variety of different reasons, resulting in uncertainty regarding the extent to which the Scheme’s objectives are being realised. The ANAO observed that ABARES studies found that approximately one-fifth of all FMD accounts were used for personal or retirement savings. Agriculture officials acknowledged that funds in FMD accounts may not be entirely derived from income resulting from primary production, and that data provided by financial institutions does not necessarily identify the source of income.
8.41
Recommendation 3 of the ANAO’s report suggested that Agriculture and the ATO both review the quality of the data provided by financial institutions to ensure it is fit for purpose, and to consider improvements to the ‘use of the data, to increase the net benefits of the data collection and/or reduce costs on financial institutions or within government’. Both agencies agreed to the recommendation.
8.42
Agriculture advised that improvements had been made in data quality by liaising with financial institutions and improving relations with the ATO. ATO representatives also advised that it had ‘pinpointed and prioritised the data quality and completeness issues that stop [it] from using the bank data for various purposes at the moment’, and would meet with Agriculture and financial institutions to address these concerns.
Performance
8.43
The ANAO reported that the 2016 policy changes had created only ‘modest impacts’, pointing to data collected by the ATO indicating that take-up rates of the FMD Scheme’s 2016 policy changes have been low. The ANAO also pointed to two ABARES studies from 2017-18 which indicated low take-up rates of the FMD Schemes. The surveys found that only 26 per cent of farms held an FMD account, and almost half of all FMD holdings were held by large farms with a turnover of between $1 million and $5 million. The surveys found that around 63 per cent of FMD account holders were using their accounts for tax management purposes. They further indicated that the average FMD balances were ‘significantly below the $800 000 deposit limit introduced in 2016 (and in most cases below the previous deposit limit of $400 000)’.
8.44
As to why the Scheme was not being more widely adopted by primary producers, Agriculture suggested that a number of potential FMD Scheme account owners may not have the spare capital to place into the accounts. This was considered to be consistent with the demographic of FMD Scheme user, which tend to be at the ‘higher end of farm performance’.
Stakeholder Engagement
8.45
As part of the planning process for the 2016 policy reforms, Agriculture sought consultation from interested stakeholders through its Green Paper and White Paper. The ANAO explained that a number of peak bodies representing primary producers engaged with this process and that over 10 organisations suggested increasing the deposit limit to $1 million or more. The audit found:
Of the published submissions on the Green Paper that specifically commented on the FMD Scheme, the ANAO identified 15 responses that were in favour of the early access provisions, 20 in favour of increasing the deposit limit, and two expressing caution on this change. In addition, two respondents made suggestions on using FMDs for offset purposes.
8.46
All three options were presented to Government for decision in April 2015, including assessments of the proposals. The direction to set a $800 000 deposit limit on FMD Scheme accounts was provided from the Minister of Agriculture’s office.
8.47
Financial institutions were also consulted. Agriculture stated that:
The department advised the changes were not supported by the finance sector, due to the claimed expense of developing and implementing new FMD products, the revenue they expect to lose because of the offset arrangements, and the cost of holding higher levels of cash reserves that would be needed under the prudential requirements of the Australian Prudential Regulation Authority. In addition, the advice included that a number of banks would not be in a position to offer FMD loan offset products from the start date of 1 July 2016.
8.48
Agriculture also advised the Government during the proposal process that a limit of $800 000 or more would benefit a very small number of primary producers.
Concluding Comment
8.49
This Committee has previously considered and reported on the ANAO’s prior audit of the Farm Management Deposit (FMD) Scheme in 2003, and made a recommendation that the department ‘assemble a rigorous set of Key Performance Indicators for the Farm Management Deposits scheme that consist of credible administrative performance targets.’
8.50
The ANAO’s audit into the administration of the FMD Scheme examined here highlights a number of issues applicable across government program delivery, including the importance of strategic relationships between portfolios and shared responsibility of programs across a number of departments.
8.51
The Committee observes that the recommendations issued by its own report in August 2004, which relate to performance measurement and the use of key performance indicators, have not been implemented. The Committee reiterates the findings in that report which highlighted the need for clear and measurable methods of performance assessment. The adoption of clear performance measurements and indicators would assist the two agencies in meeting the recommendations issued by the ANAO and improve the efficiency and effectiveness of the FMD Scheme.
8.52
The Committee broadly agrees with the findings and recommendations of the ANAO’s report into the operations of the FMD Scheme. With regards to Agriculture’s proposed evaluation of the scheme, the Committee shares the ANAO’s concerns regarding a lack of focus on identifying whether the scheme is achieving its primary policy objective of ‘improved self-reliance’.
8.53
The Committee considers that the evaluation of the Scheme’s performance against the stated objective is of critical importance, and given the cost of the Scheme, consideration should be given to whether other means could better achieve it. Identifying potential alternatives will assist in ensuring the Scheme is administered effectively and provides targeted relief and assistance to primary producers, particularly in years of drought.
8.54
The Committee also endorses the findings of the ANAO in relation to risk assessment and compliance management. The Committee acknowledges the observations of the Auditor-General in relation to the disparate views of risk by different agencies considering their broader perspective, and notes that this issue is not unique to the FMD Scheme. The Committee, however, is of the view that the ANAO’s findings that the ATO has not fully captured details of the Scheme in its risk assessment are sound, and that this should be rectified in a future risk assessment.
8.55
The Committee recommends that the Department of Agriculture examine whether the Farm Management Deposits Scheme is meeting its policy objective of 'improved self-reliance’ through a range of methods including its proposed evaluation, and assess alternative options of achieving the objective if the results do not demonstrate that the policy objective is being met. The findings should be reported back to the Minister, with an update provided to the Committee.
8.56
The Committee recommends that the Department of Agriculture and the Australian Taxation Office implement specific key performance indicators in order to measure the performance of the Farm Management Deposits Scheme, and for the results to be published in Annual Reports.
8.57
The Committee recommends that the Australian Taxation Office undertake a new risk assessment of the Farm Management Deposits Scheme with input from the Department of Agriculture, including matters such as compliance and policy changes, and to issue a new risk rating if required.
Ms Lucy Wicks MP
Chair
10 June 2020