Farm Management Deposit use surges on the back of positive business conditions and rising interest rates

Positive business conditions and a rising interest rate environment have sent the use of Farm Management Deposits surging 29 per cent nationwide, with new figures showing WA farmers have nearly $700 million lodged in the scheme. The National Australia Bank this week released data that revealed the number of Farm Management Deposits grew 29 per cent by the end of June 2022, after five years of relatively flat growth. An FMD account allows primary producers to make tax deductible deposits during more profitable years and withdraw them during challenging years. Federal Department of Agriculture figures show WA farmers had $688,515 million spread across 4267 accounts in March, adding to the $5.82 billion sitting in the scheme nationwide. NAB regional and agribusiness executive Khan Horne said agribusinesses were taking advantage of good conditions to build resilience into their businesses. “The growth in FMD volumes can be attributed to a range of factors including excess liquidity in the deposit system, coinciding with the first uptick in interest rates as part of the current rate tightening cycle,” he said. “It also reflects the wider, growing interest from NAB customers in term deposits as they seek better returns and more certainty in a volatile rate environment. “Conditions have changed significantly in the past year, moving from an ultra-low to a rising rate environment, with the RBA increasing the cash rate 10 consecutive times, from 0.10 per cent to 3.60 per cent.” Farm Management Deposits were introduced in 1999 to allow farmers to reduce their taxable income in good year through deposits into an FMD account. Tax is not paid on the money until it is withdrawn in a bad year. In mid-2016, regulations were changed to allow banks to offer products that let farmers offset their FMD against their other loans. The majority of the nation’s rural lenders started allowing farmers to offset their deposits to offset interest on farm loans in 2018. Mr Horne said NAB had observed a shift from transactional or at-call accounts, into term deposits. “This trend may slow down as the rate difference between term deposits and at-call narrows,” he said. “We’ve seen an 80 per cent increase in total term deposit volume from the bottom of the cycle to now. “Acknowledging the strong growth in 2022, we have seen total business deposits (excluding financial institutions) system growth slowing in recent months, potentially pointing to less liquidity due to rising interest rates and cost of living increasing.” Grain growers are usually the biggest users of the scheme, which is often used as a barometer of the performance of the farming sector as a whole as well as specific agricultural industries. Mr Horne said agribusinesses were considering and utilising tax-effective FMDs as part of “well-considered tax planning”. He said they would be used to build resilience into their businesses. “We expect to see a topping up of FMD balances as the financial year closes out,” Mr Horne said. “FMDs typically spike in the June quarter, largely due to tax planning, and it’s generally advisable to speak with tax planners, financial advisers and bankers in the lead up to 30 June about the appropriate debt, cash and cash flow planning and management.”