Natural Disasters: Some Taxation Issues

The often quoted words of Dorothea Mackellar describing Australia as a land “of droughts and flooding rains” continue to resonate with natural disasters impacting people and property with all too frequent regularity. The primary production sector commonly experiences significant livestock losses and property damage, including fencing and other infrastructure, because of drought, fires and floods. Recent flooding experienced in Queensland as a result of ex-Tropical Cyclone Dianne provides us with yet another example.

With due recognition of the climatic extremes, businesses and government bodies undertake two approaches, the first being to be better prepared for such events by developing more resilient practices and structures and the second being to have processes and procedures in place to deal with the event when it is experienced, to support individuals and businesses that are impacted and to repair community infrastructure damaged by relevant events. 

This article briefly reviews some tax concessions available to primary production businesses to prepare for, with the objective of ameliorating the impact of natural disasters as well as providing guidance as to the taxation consequences of receiving amounts relating to such events. The following are examples of the tax consequences of expenditure incurred to make a primary production business better prepared for climatic extremes: 

• Water Facilities – Plant or a structural improvement that are primarily and principally for the purpose of conserving or conveying water, eg a dam, tank, tank stand, bore, well, irrigation channel, pipe, pump, water tower, or windmill, etc. To claim an immediate deduction, the following conditions must be satisfied:
  • The taxpayer must incur capital expenditure on the construction, manufacture, installation or acquisition of a depreciating asset that is a water facility;
  • The expenditure must be incurred primarily and principally to conserve or convey water; and
  • The water must be for use:
    • In a primary production business conducted by the taxpayer on land in Australia, or
    • If the expenditure is incurred by an irrigation water provider, the water must be for use in primary production businesses conducted by other entities on land in Australia, to whom water is supplied by the irrigation water provider.
• Fodder Storage Assets - Primary producers may deduct capital expenditure on a fodder storage asset in the income year in which the expenditure is incurred for fodder storage assets first used or installed ready for use. A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. A fodder storage asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is a fodder storage asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia. Fodder refers to food for livestock, such as grain, hay or silage. 
• Fence and Fencing Assets - Primary producers may claim an immediate deduction for capital expenditure on fencing assets in the year in which the expenditure is incurred. The term “fence” takes its ordinary meaning and includes an enclosure or barrier, usually of metal or wood, as around or along a field, or paddock. Where expenditure relates to repairing an existing fencing, it would generally be deductible as a repair rather than as capital expenditure.
• Landcare Operations - Capital expenditure incurred on Landcare operations qualifies for outright deduction in the year the expenditure is incurred. Qualifying expenditure includes amounts incurred for preventing or combating land degradation, otherwise than by the erection of fences on the land. The expression “land degradation” includes not only soil erosion but also other effects detrimental to the land, such as decline of soil fertility or structure, degradation of natural vegetation, deposits of eroded material or salinization.
• Other Measures – Primary producers have income smoothing measures including income averaging and farm management deposits available to them to enable them to manage their tax liability with due recognition of the fluctuating incomes that may arise from climatic extremes. 

Primary producers may receive irregular receipts due to natural disasters and those receipts can include receipts from the forced sale or destruction of livestock, insurance receipts and receipts from governments and other organizations to assist them to deal with the impacts on their business.

• Spreading or Deferring the Tax Profit - A primary producer can elect to spread or defer the tax profit from the forced disposal of livestock as a result of certain events including the destruction of pasture or fodder due to drought, fire or flood. 
• Insurance Recoveries – Amounts received for the loss of livestock because of drought, fire, flood, disease or other disaster may be spread over 5 years. 
• Disaster Assistance Loans and Essential Working Capital Loans may be available to go towards repairs and asset replacement, restocking, and costs to keep operational such as paying wages, rent and rates. As a loan they would not be assessable on receipt by the primary producer, but the use of the funds would generally be deductible to the extent that the funds are used for deductible purposes. Where the primary producer is registered for GST, they would generally be entitled to claim input tax credits on the relevant expenditure. Interest payable on the loans may be at concessional rates and the interest paid would generally be deductible to the extent the loan was used for a deductible purpose.
• Business Grants - Grants may be available for affected primary producers to hire or purchase equipment and materials, clean up, remove debris, replace fencing and other costs associated with the recovery process. Applications should include evidence of the direct damage sustained by the relevant events. Generally, to be eligible to receive the full grant amount, the evidence to be submitted with applications will include quotes, tax invoices, official receipts and full evidence of why the grant is required and/or how the expenditure will/has been (be) incurred. Where the relevant expenditure has been incurred for deductible purposes then the grant may be considered to be a “recoupment” of that deductible expenditure and accordingly it would generally be assessable to a primary producer.
• Disaster Relief – Occasionally primary producers will receive one-off disaster relief money from a charity as part of community assistance and these amounts will generally not be assessable income where the financial hardship is experienced because of a natural disaster such as a flood, drought or bushfire. Such financial assistance may be received from a charity for the basic necessities of life - that is meeting essential family household bills such as food and water, clothing, health and medical bills, children's education costs and the normal household bills of electricity, phone, fuel and communication. 

Author: Tom Delany, CTA, is the principal of Tax Partner Pty Ltd, which provides tax training, and tax consultancy services to accounting and legal firms including a wide range of tax advisory services such as high-level tax planning in addition to preparing tax advices, private ruling requests and objections on a variety of tax related topics.