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Journal of Australian Taxation |
THE AUSTRALIAN INCOME TAX SYSTEM: HAS IT HELPED OR HINDERED PRIMARY PRODUCERS ADDRESS THE ISSUE OF ENVIRONMENTAL SUSTAINABILITY?[*]
By Margaret McKerchar[∗∗] and Cynthia Coleman[∗∗∗]
This article explores the history and events that shaped the Australian income tax system as it has applied to primary producers. In particular, it examines the effectiveness and consequences of the system in addressing the commitment and practices of primary producers to conserving the environment. Over time, the tax system has had a range of concessions available to primary producers that were initially aimed at allowing them to manage their financial viability in the short-term, while at the same time achieving equity with other taxpayers who receive more regular forms of income. In more recent years, further concessions have been available to primary producers to encourage them to invest capital expenditure in new plantations or to manage their environmental sustainability in the long term. The article examines the underlying reasons for these concessions, how they differ from those available to other taxpayers, why they have changed, and their outcomes. In particular, it examines the extent to which these concessions may conflict, be misdirected or be counter-productive. For example, will a primary producer who is in a loss (either commercial or non-commercial) or low taxable income position be attracted to invest in a land conservation measure because of a tax deduction or offset? What are the environmental consequences of encouraging taxpayers to invest in the planting of vineyards and obtain accelerated deductions for the capital expenditure incurred? It is argued that the income lax concessions directed at environmental sustainability have not been effective in the case of primary producers because they tend to place more emphasis on tax planning (short-term) rather than environmental planning (long-term) issues. That is, a tax deduction is little incentive when you have minimal tax to pay. Suggestions are made as to how the income tax system could be better used to encourage environmental sustainability.
This article examines the history and evolution of the Australian income tax system as it applies to primary producers and argues that its provisions have been directed at short-term economic concessions for individual producers rather than the long-term sustainability of farm businesses, the industry or of the environment. The article is presented in four sections. The first section examines the historical development of the Australian income tax system in general and specifically, its relationship with primary producers. The second section of the article considers the consequences of the income tax system on both the financial decision-making of primary producers and their usage of natural resources. The third section highlights existing tax provisions that are in direct conflict with environmental concerns and finally, the concluding section of the article proposes changes to the income tax system, in respect of primary producers, that may be more appropriate for a more sustainable Australia.
While taxation in Australia has a relatively short history, one feature that it does share with many other countries is that income taxation in Australia is, and has been since its inception, the principal source of revenue for government. In this section of the article the history and evolution of the Australian income tax system is explored with emphasis on provisions relating specifically to primary producers. However, before doing so, a brief overview of the history and nature of agriculture in Australia is presented. The section concludes by drawing together both these threads: tax and agriculture and analysing the development of their relationship.
When Governor Phillip first set sail from England for Australia in 1787, one of his orders was to cultivate the land. To this end, he had twelve ploughs on board his First Fleet. However, he had no oxen, draught horses, farmers or free men, only sailors and convicts with no farming skills or knowledge. Further, the soil was found to be poor and the climate dry. Together, these factors made cultivation of the land not feasible for the early settlers and instead, pastoral activities were established. The ready availability of large quantities of free land was to drive a rapid pastoral expansion that lasted for several decades. This expansion inflated the demand for livestock (in particular sheep, which were more tolerant of the dry conditions than cattle). An export market for wool was developing (the importation of 5,000 merinos in the 1820s laid the foundations of the industry) and also contributed to demand for livestock, keeping prices high until a severe drought in the 1820s. There was a further expansion in the 1830s followed by a general depression in the 1840s. Cultivation of land remained minimal and was on average less than 10% of land grants.
The depression of the 1840s was due in part to the lack of new entrants in the local market, with demand for livestock falling as a result. This curtailing of pastoral expansion was largely caused by the British Government (in a bid to increase cultivation rates) deciding in 1831 to stop making land grants and instead to sell the land at the price of five shillings an acre. Many graziers ignored the regulations and simply “squatted” on Crown land without title. The squatters had considerable social and political power and eventually forced the Crown to agree to compensate them for improvements made on this land (by 1890 in New South Wales alone squatters had put up about 2 million miles of fencing). This effectively made it impossible for would-be producers to buy Crown land.
The Australian gold rushes of the 1850s and 1860s led to high levels of immigration. In turn, the increased population stimulated agriculture, including dairying and the growing of wheat, sugar and fruit. After the gold rushes, ex-miners became the labour force for the squattocracy and enabled them to continue their pastoral expansion. Between 1860 and 1894 the sheep population rose from about 20 million to 100 million and cattle from 4 million to more than 12 million. However, pests (principally rabbits which were first introduced to Australia in 1859), falling prices for wool, general economic depression, excessive pastoral expansion and the great drought were together to bring about a collapse of the sector by 1900.
After 1900, there was a rapid expansion of Australian agriculture. Federation led to the removal of the interstate tariffs that had previously hampered trade between the colonies (now States); and the States bought back three million acres of land from the squatters (who were heavily in debt after their collapse), subdividing it into smaller holdings and resettling families. Many of these holdings were later to prove to be too small to be economically viable. The Water Act 1905 (Cth) paved the way for extensive irrigation schemes on the Murrumbidgee and Murray Rivers and immigration of “would-be” farmers. The expansion of the railway into the wheat belts of New South Wales and Western Australia along with rising world prices, improved shipping and improved farming techniques, saw wheat acreage treble to 9 million by 1911. During this period sugar output also doubled and refrigeration helped promote the development of the fruit and dairy industries. By 1910, cattle numbers again exceeded 11 million. However, as before, the pattern of rapid expansion was to be followed by recession.
By the late 1920s, after the effects of World War I, the government was making arrangements to protect various agricultural industries including dairy, sugar and dried fruit. The cost of protecting these industries was estimated at the time to be £22M. Graziers did not receive any assistance. Sheep growers, who were better able to cope with the dry conditions than were cattle growers, appeared to have recovered and were producing 900 million pounds of wool from 100 million sheep at the time.
The Great Depression of the 1930s struck both farmer and grazier hard and the government was providing direct help to almost every form of farming activity during the 1930s. In some respects this help discouraged efficiency and impaired sound decision-making by farmers (for example, the slow contraction of wheat acreage when world prices were falling). In terms of the value of primary production between 1928-29 and 1938-39, pastoralists, wheat growers and dairy farmers remained considerably much better off than other farmers. Poverty, unemployment and substandard infrastructure in rural Australia led to many leaving the land and relocating in urban areas.
After World War II Australian agriculture became an increasingly capital-intensive industry, to the extent that producers were reliant on government assistance either directly (including research and marketing bodies) or indirectly (such as through the provision of infrastructure). Prosperity in the wool industry peaked in 1950-51, with returns for the following year falling by half. Wool prices generally fell from this time until the 1970s. In 1950-51 the gross value of wool production was 56% of the total value of production of all agricultural industries, compared to 15% in 1970-71. The period of Australia “riding on the sheep’s back” was over.[2] Until the 1950s, agricultural products accounted for more than 80% of the value of Australia’s exports, but that proportion has since declined markedly. The boom and bust cycle of Australian agriculture was firmly established, as was the role of government in providing support.
The current situation is not dissimilar. Fluctuating prices, rising costs due to a declining exchange rate, and drought have been the major influences on farm performance in the 1990s and now into the next century.[3] Average farm sizes have increased and the number of agricultural establishments has declined. Falling wool prices have led to a decline in sheep numbers of 30% over the 1990s, with many of these producers moving into intensive cropping industries. During this decade the area planted to irrigated rice increased by 30%; the area of irrigated cotton doubled; and cattle production became more intensive with the number on feedlots having more than doubled. There has been an increased use of technology.
Productivity growth has not been uniform across industries, and there are significant differences within industries with larger producers achieving much higher growth due to economies of scale. In 1999-2000 24,0000 or 23% of Australian farm businesses had a turnover of $300,000 or more and contributed 66% of the total turnover of all Australian farms. At the other extreme, 18% had a turnover of less than $50,000 contributing 2% of the total turnover and operating at a business profit margin of 0.1%.[4] Farm incomes have declined and the level of debt has risen steadily. This has led to an increased dependence on off-farm income for many farming families.
At the beginning of the 1990s the farm sector contributed around 3% of Australia’s GDP, and this has remained steady throughout the last decade. Agricultural output has increased over this period, but at the same time, the value of production of other sectors, including mining, manufacturing and services, has grown. The value of exports from the farm sector increased significantly with $23B worth of agricultural products exported in 1999-2000 (50% increase in real terms since 1990-91). The farm sector (particularly the production wool, beef, cotton and sugar) remains an important source of overseas earnings for Australia.
There has been an increasing tendency towards the reduction of government intervention in the 1990s with increasing deregulation and the reshaping of the roles of statutory industry bodies. This has been part of a deliberate shift towards a more efficient sector driven by market forces. However, the onset of the current serious drought has prompted both State and Commonwealth governments to announce a wide range of measures including income support and interest rate subsidies.[5] The expectation, that government should (and will) provide direct financial support to the farm sector, remains a feature of Australian society. Such support is ultimately financed by the tax system, of which around 70% was raised from taxing the income of individuals and companies in the 2000-01 year.[6]
Australia became a Federation of States in 1901 and the first Commonwealth Government was formed. Prior to this, the States were separate colonies that levied their own taxes, including income tax.[7] With Federation, the Commonwealth was given an exclusive power to impose customs and excise duties in addition to a general power of taxation that was concurrent to the States. The expectation was that customs and excise would provide adequate revenue for the Commonwealth so that the States would continue to levy income tax. However, the funding required for World War I was beyond the revenue-raising capacity of the Commonwealth, hence the introduction of Australia’s first federal income tax in 1915.
Since its inception, the tendency in developing and implementing Australia’s income tax policy has been to adopt a consultative approach process (as evidenced by a succession of royal commissions, committees, summits and reviews) that has invariably produced outcomes in favour of those parties with the most influence. Given the importance of the squattocracy in the early economic and social development Australia, and of the farm sector in general to the economy, primary producers have invariably been an influential party.
The first royal commission (Warren Commission) on taxation in Australia was established in 1920 and was required to enquire and report upon:
... the giving to primary producers of special consideration as regards the assessment of income tax, particularly in relation to loss relating from adverse weather conditions.[8]
One of the recommendations by the Commission was the introduction of a five-year income averaging for primary producers whereby they paid tax on their taxable income at their average rate of tax. This system remains in force today, though it was modified in 1978 (in response to tax avoidance schemes)[9] to generally limit the effect of averaging to income from primary production. A similar system of income averaging was introduced for artists, composers, inventors, performers, sportspersons and writers in 1987 (more than 60 years later) in recognition that not only primary producers had fluctuating income. However, no such system exists for the many businesses whose livelihood depends upon the performance of the farm sector.
During the great depression of the 1930s, the Commonwealth Government established another royal commission, the Ferguson Commission, principally to make recommendations on the standardisation of taxes and on maintaining government revenue. The new Income Tax Assessment Act 1936 (Cth) (“ITAA36”), consisting of one slim volume, replaced the existing Income Tax Assessment Act 1922 (Cth). During World War II the Federal Government transferred income-taxing powers from the States to itself, and retains this power today.
The ITAA36 has undergone considerable amendment over time as the use of tax policy has been extended from raising revenue to providing welfare and industry support. Three committees (the Spooner Committee, the Ligertwood Committee and the Hulme Committee) were held during the 1950s, a period during which a number of concessions for primary producers where introduced by the then Menzies Liberal Government. These included the use of low minimum values for natural increase (which effectively meant the recognition of any gain in value was deferred until the livestock were sold); the ability to defer paying tax on any profit arising from the forced disposal of livestock as a result of natural disaster (which effectively helped producers restock); the ability to defer paying tax until the following year on any profit arising from shearing twice in one year as a result of natural disaster; the ability for a primary producer to elect to withdraw from income averaging (which effectively meant they could withdraw where their income was increasing and the system no longer advantaged them); concessions for certain expenditure on capital intensification (including construction of dams and irrigation systems) aimed at increasing agricultural production; the inclusion in the income averaging system of insurance recoveries as a result of flood, fires or natural disasters; and the widening of the definition of primary production to include fishing and pearling.
The Asprey Taxation Review Committee was set up in 1972 to undertake a comprehensive review of the tax system. The Committee made far-reaching and extensive recommendations in its report released in 1975, but very few were adopted at the time. One exception was the introduction of an Income Equalisation Deposit Scheme (“IED Scheme”) in 1976. The purpose of the IED Scheme was to encourage primary producers to defer the tax on a portion of assessable income in years of high income, thereby becoming more financially self-reliant.[10]
The 1970s was a period rocked by a series of tax avoidance scandals, including the treatment of carry forward losses (up until 1989, primary producers enjoyed much more favourable terms than any other taxpayers) and the use of income averaging. The system was complex and people felt they were paying too much tax – understandable when one considers that the top marginal rate was 60 cents in the dollar and that it cut in at $35,000. One important change related to primary producers and the environment was that the deductibility over a ten-year period of expenditure on land development (including clearing) incurred prior to 24 August 1983 was repealed.
The Mathews Committee was formed in 1983 to investigate the effects of inflation on the Australian economy and tax system. It found that the system discriminated against salary and wage earners, required the poor to pay more taxes than many of the rich, destroyed incentives to undertake productive activity and was unduly complex and cumbersome. Further, Mathews identified that farmers, small-shopkeepers and self-employed contractors and tradesman dominated the list of tax evaders.[11]
The Hawke Labor Government came to power in 1984 inheriting high budget deficits and promising much-needed comprehensive tax reform. To this end, they released a Draft White Paper outlining three options for consideration by a national tax summit held in 1985. The Draft White Paper recognised that the tax base was riddled with concessions (including the treatment of farm losses, negative gearing of property investments, gold mining, mineral exploration and production of films) that impaired economic efficiency and altered taxpayers’ behaviour and directed resources from their most productive use.[12] Option A discussed the restriction of the write-off of losses on farming activities against non-farm income. While deemed unacceptable at the time, this restriction was to subsequently re-emerge in 2000 with the introduction of the non-commercial losses regime.
In spite of good intentions, and intensive consultation with major sectional interest groups, the national tax summit led to even greater division on the nature of tax reform that was required. The end result was a “cobbled together”,[13] token reform package that was acceptable to a Cabinet that wanted to avoid the possibility of rejection by Senate. Describing this process as steamroller tactics and devoid of informed ministerial debate, Groenewegen[14] attributed the failure to implement tax reform to the Australian political institution.
However, there were changes during this period that directly affected primary producers. Expenditure on water conservation and conveyancing incurred prior to 20 September 1985 had been fully deductible, but was now to be written off over a three-year period. The meaning of land degradation was extended to include the “decline in soil fertility or structure, degradation of natural vegetation, the effects of deposits of eroded material, or salinisation etc”.[15] Prior to 20 September 1985, only expenditure to combat soil erosion was deductible.
Another deduction available at the time was a 40% general investment allowance on expenditure on plant incurred in carrying on a business (primary production or otherwise). This allowance was a one-off deduction in addition to the existing depreciation provisions.[16] This allowance was withdrawn from 1 July 1985. It had been an influential deduction for primary producers at the time as evidenced by the fact that in 1987, tractor sales were barely half the number sold just six years before.[17]
The tax debate continued in the 1990s, with the Australian Taxation Office (“ATO”) taking a more pro-active role in addressing revenue leakages – of which losses from carrying on a business of primary production were given high priority. Neither the ITAA36 nor its partly rewritten “plain English” counterpart, the Income Tax Assessment Act 1997 (Cth) (“ITAA97”) (both of which remain operational as the rewrite was disbanded after being only about one third completed), had a workable definition of “business”, thus taxpayers charged with the responsibility of self-assessment since 1986, turned increasingly to the principles established by the courts.
The ATO took exception to some of these findings as being general principles[18] and released a public Tax Ruling TR97/11 to counteract this trend. In Australia, public tax rulings are as binding on taxpayers as is the tax law itself. Still not content, the ATO then pressured the Government to introduce the non-commercial loss provisions whereby even though taxpayers may be in “business”, if their activities are not profitable or operating at a prescribed scale, they are deemed to be non-commercial. Any loss that arises from non-commercial activities is quarantined, that is, can effectively only be offset against income from the same activity in a later year. However, it is questionable that the provisions contained in Div 35 of ITAA97 are effective or fair. The alternate tests (there are four) of which the taxpayer must satisfy one to be regarded as “commercial” are clearly weighted in favour of wealthier taxpayers. To address this to some extent, an exception clause was introduced for primary producers whose non-farm income was less than $40,000pa.
The 1990s also saw the onset of mass-marketed schemes, many of which were directed at tax avoidance, and often involving primary production activities of one form or another. These schemes required large capital outlays, which were claimed as immediate tax deductions by investors who saw this as their chance to create wealth by negative gearing. Unfortunately it took the ATO a number of years to disallow these deductions and issue amended assessments with penalties and interest charges imposed. While cases that did go before the courts were found in favour of the ATO,[19] the public outcry was such that the ATO ultimately waived the penalties and interest. While similar investment opportunities still exist, promoters nowadays would normally seek a binding product ruling from the ATO beforehand, thereby guaranteeing investors the deductibility of their tax investment.
Many of these mass-marketed schemes were driven by changes to the deductibility of expenditure in establishing vineyards (introduced in 1993) and horticultural plantations (introduced in 1995). The write-off provisions for capital expenditure on viticulture were much more generous (four-year period beginning from the day of planting) than those for horticulture (over the effective life of the plant, beginning from when it first produced assessable income which could be several years from first planting), principally because of the bargaining power that the wine industry held at the time in respect of sales tax.[20] “Horticulture”, a poorer cousin compared to viticulture but perhaps not treated unfairly compared to other non-primary production industries, was not even included in the definition of primary production in the ITAA36 until 1992. As an industry group, horticulture has had limited influence on tax policy.
Environmental tax issues were gaining prominence in the wider Australian community in the 1990s. Deductions for expenditure on the prevention of land degradation were extended to include other taxpayers, not just primary producers, carrying on business on rural land from 1991. In a bid to boost expenditure by lower-income primary producers on land and water conservation measures a tax offset (or rebate) were introduced from 1 July 1997 but subsequently repealed from 1 July 2001. Other measures in this era included a small and short-lived investment allowance for primary producers who invested in drought mitigation equipment. In spite of the extent of the current drought, no tax incentives have been offered for drought preparation or recovery.[21]
The year 2000 was a year of major tax reform in Australia, with the introduction of a goods and services tax as part of A New Tax System (“ANTS”), changes to capital gains tax which included relief for primary producers who retired, and the so-called Simplified Tax System for small businesses. There were changes to the systems for collecting tax, with provisional tax payments being replaced by an instalment system (in which primary producers pressured for, and received, greater time concessions).
ANTS arose from the Ralph Review of Business Taxation that was established in 1997. Similar to other committees and reviews beforehand, few of the recommendations of the Ralph Review have been implemented to date. One key recommendation was directed at the taxation of trusts, which were widely viewed as tax avoidance vehicles. Following pressure from primary producer groups, however, this recommendation was abandoned.[22]
This section has provided an overview of the evolution of income tax policy in Australia with focus on the treatment of primary producers. Other industries that have successfully used the tax system to gain concessions, and thereby encourage capital investment and fund expansion, include the Australian film industry (from 1980s) and mining (income from gold mining was exempt prior to 1991) – both being significant earners of export dollars. Expenditure on research and development has also been another area in which expenditure has been encouraged to varying degrees in more recent decades, as has expenditure on environmental protection earthworks from 1992. In both these latter cases, capital expenditure can currently be written off over 40 years, which arguably offers little incentive.
What does emerge is that Australian tax policy is subject to the influence of various groups at any point in time and that some groups have more influence than others depending to some extent on which political party is in government. Policy makers appear to rarely follow the advice of appointed experts. Australian tax policy is subject to frequent change, is very complex and is lacking in clear direction. Much publicised policy announcements tend to be watered down at the implementation stage and their availability and appeal is severely restricted. Successive governments of both major political persuasions have failed to live up to their promises of comprehensive tax reform, instead taking the path of short-term political survival rather than living up to longer-terms social or environmental goals for a sustainable future.
From the discussion thus far it should be readily apparent that from the enactment of first Income Tax Assessment Act in 1922 and the introduction of income averaging for primary producers, Australian farmers have wielded considerable influence over the income tax system. These threads are now drawn together and the key instances that evidence the strong relationship that exists between income tax and agriculture in Australia are highlighted.
Initially, it was the graziers with their wealth, productivity and social standing as the squattocracy that allowed them to enjoy a powerful position in the economy. While they did not receive the financial support that other farmers did in the 1920s, they were able to use the income averaging system and this did give them a tax advantage whilst their income increased.[23]
The changes to the income tax system in the 1950s were more wide reaching in terms of providing concessions to graziers, and in particular, to sheep producers, who were experiencing difficult conditions at that time. These concessions remain in the current tax system, but have never been extended to other forms of agriculture that may, for example, be forced to harvest early or dispose of trading stock because of natural disaster. The definition of a primary producer for tax purposes remained narrow.
The post-war need for agriculture to become more capital intensive was supported by the introduction of the general investment allowance. However it is doubtful this led to an efficient use of resources, instead the tendency was to over-capitalise. As much of the equipment purchased by primary producers was imported, the overall economy suffered from a worsening balance of payments.
In 1975-76, total tax payments in Australia were $20,527.3M, of which $115.6M was paid by the primary production sector before receipt of subsidies of $331M, resulting in a net negative contribution of $2I5.4M.[24] Tax policy was changed in an attempt to encourage primary producers to become financially self-reliant (or at least less reliant on government for financial assistance). To address this the government introduced the IED Scheme. Its ongoing lack of success has resulted in it constantly being changed ever since to make it increasingly more attractive to farmers (clearly it favors high income earners). However, the IED Scheme’s rate of change has been found to contribute to the reluctance of farmers to use it.[25] While there has been growth in the rate of deposits (almost 6,000 deposits were made in 1999-2000 compared to almost 5,000 in 1995-96), it is not widely used when one considers that in 1999-2000 there were over 220,000 individual primary producers who were paying tax (and 69,507 who were not).[26]
Conservation of natural resources was another policy issue that emerged in the 1970s. Deductions for conserving water and/or preventing land degradation were substantially enhanced, but their attractiveness tended to be more appealing to high-income producers. To counter this the government introduced tax offsets for low-income producers, but these were short-lived simply because they were not utilised – you have to have surplus funds or a reasonable cash flow to consider such outgoings, and it appeared that many low-income producers had neither.
The impact of the tax system on agriculture from the 1980s is most evident in the growth of the grape industry as a result of the accelerated write-off provisions. In the fifteen years to 2000-01, the production of wine grapes increased threefold while the value of wine grape production rose tenfold from around $100M to over $1B. The number of wine producers and the amount of wine produced more than doubled. In addition, wine exports increased eightfold in volume terms since 1990 and were nearly seven times greater in value in 2000-01 than ten years earlier.[27] However, the level of total plantings fell in 2000 and is expected to consolidate: this may be due in part to the demise of many of the mass-marketed schemes. This may also be affected over time with the introduction non-commercial loss regime.
Are primary producers treated equitably by the Australian income tax system? It does not appear so, whether they are compared to other producers or to other taxpayers. Are their circumstances any more risky than that of businesses in other industries? Perhaps not, given the extent of globalisation. What is clear is that primary producers are at least as influential today as they were 100 years ago, their defeat of the entity taxation recommendations of the Ralph Review being a recent example. It appears that primary producers have more influence on Australian tax policy than vice versa.
In this section the attention focuses on the impact of changes to the Australian income tax system on the financial decision-making of primary producers and ultimately, the environment.
The income tax system has directly encouraged investment in pastoral activities, irrigation and viticulture and has clearly been effective given the rate of growth in these industries. The pastoral activities have led to the clearing of 100 million hectares of forest and woodland since first settlement. As at 30 June 2000, around 60%, or 456 million ha of the total land area of Australia was used for agriculture, with around 10% of this being under cultivation. Introduced pastures and grasses have replaced large areas of native vegetation.
Agriculture is the dominant consumer of water in Australia; in 1996-97 it accounted for 15,502 gigalitres or 70% of total water use.[28] Australia’s production of crops, in particular, vegetables, fruit (including grapes) and sugar, is heavily dependent on irrigation, with around 2.4 million ha of land being under irrigation. The construction of dams and the use of irrigation have greatly altered water flows and the times of their peak. The increasing use of irrigation has caused a decline in soil structure and water quality and has exacerbated soil salinity. Part of this growth in land under irrigation can be attributed to the growth in viticulture. The estimated cost to agriculture of land degradation in 2000 was $2,560M.[29]
While there are concessions in place for expenditure on the prevention of land degradation, how effective have they been? The Taxation Statistics 1999-2000 provide some indication, although the relevant figures for individuals are not available prior to the 1997-98 year. For individuals, around 16 500 primary producers claimed in total around $57M on landcare operations and water conservation measures for each of the last three years (the peak year being 1998-99). This compared to 1,736 individuals who were not engaged in primary production who claimed $4.3M in 1999-2000. The figure spent by non-primary producers had fallen by half from 1997-98. In terms of the tax offset available for low-income producers, the amount allowed can only be minimal as it is not listed as a separate category of offset, but included as “other” (around 9,000 individuals claimed an “other” offset in 1999-2000, the total being around $11M). While the drought investment allowance had an initial impact of 1993-94 with over 13,000 individuals claiming $31M, by the 1999-2000 only 212 individuals claimed a total of $51,111.
Statistics on amounts spent by companies on the prevention of land degradation are available from the 1994-95 year. In that year only 300 companies claimed this deduction, and the total amount was $12.3M. In contrast, in the 1999-2000, 483 companies claimed a total of $28.7M on the prevention of land degradation expenses (which may be related to growth in the mining sector rather than to increased use by primary producers). However, given that there were over 15,000 engaged in primary production and almost 600,000 companies in total, the level of expenditure is minimal.
These figures would indicate that offering tax deductions and offsets have had limited effect in terms of encouraging investment in water conservation and the prevention of land degradation. This is not a new finding. Others have made the point previously that such concessions are a poor means for government to address environmental objectives. Davenport[30] stated that in the face of mounting evidence as to their ineffectiveness, their continued existence could only be explained on political grounds. Davenport also reports on a study conducted by ABARE in 1994 where it was found that of those primary producers who had invested in land or water conservation measures, the majority would have made the investment without the concession. Instead of tax concessions, Davenport argues that improved access to information appeared to be more influential in primary producers adopting conservation practices.
Changing agricultural practices, such as the growth in use of more efficient irrigation systems (the use of flood irrigation has dropped from 74% in 1990 to 70% in 2000),[31] better stubble management methods to reduce soil erosion, and the planting of lucernes, salt-tolerant pastures and trees, are indicators of a growing awareness by farmers of environmental issues. However, at the same time it appears that Australians as a whole are less concerned about environmental problems now than they were a decade ago. In 1992, three out of four Australians stated that they were concerned about the environment, but this level of concern fell to 62% in 2001. This decline in the level of concern was most pronounced among young Australians.[32] Perhaps this may change when the cost of environmental degradation is passed on to consumers.
There emerge a number of instances in which current tax policy (as it applies to primary producers) is clearly in conflict with environmental sustainability. These include the use of minimum values for natural increase in livestock, the election to defer abnormal profits on disposals of livestock, and the accelerated write-off provisions for water conservation and the establishment of vineyards.
The use of minimum values for natural increase has the effect of keeping the value of closing stock low and therefore trading profit effectively does not arise (and the resultant tax liability) until the livestock is sold. This situation is exacerbated by the fact that the prescribed minimum values for natural increase have barely increased since their introduction and have not been updated since 1988-89. The election to defer profit (more so than the election to spread) from a forced disposal has the effect of deferring any tax payment on the profit until the replacement livestock are sold. Both instances encourage overstocking, which increases the likelihood of land degradation.
The accelerated write-off provisions have clearly encouraged the growth in investment in irrigation. However, this has had serious consequences for soil salinity, not only for primary producers, but also for many rural communities. Further, the expansion of the cotton industry, with its heavy reliance on chemicals, has consequences for water quality. While investment in vineyards (of which 70% are irrigated) is encouraged by tax concessions, and the capital is available via mass-marketed schemes with favourable product rulings, this intensive use of land will continue and could result in over-planting. It appears to lead only to worsening soil salinity.
The focus of the income tax system is on financial self-reliance for producers, rather than environmental concerns. Even so, there is conflict. For producers whose income is steadily increasing, their average rate of tax will reduce over time. If the same producers were to reduce their taxable income relative to their average income by making a deposit in the IED Scheme, their average rate of tax in that year would increase – making them worse off (in terms of tax liability) in the short-term. Thus income averaging may reduce the attractiveness of the IED Scheme.
The same argument would apply when making decisions about capital expenditure and how it will affect taxable income. Engaging in the prevention of land degradation may reduce taxable income below average income in that year, thereby leaving the producer to pay a complementary tax.
It would appear that the income tax system is not effective in achieving either financial self-reliance or environmental sustainability for primary producers. It can distort their financial decisions, gives them conflicting messages and creates uncertainty.
It has been long and widely held view that the Australian income tax system is too complex, changes too frequently, and is lacking in clear policy. This is the political reality of our society. In spite of numerous reviews and calls for reform, not a great deal has changed. The tax mix may be different since the introduction of a goods and services tax, but most taxpayers and lobby groups remain self-interested: leaving a Government (and a tax system) trying to serve too many masters. Worse still, the declining community concern for the environment may mean that those championing its cause are less likely to be heard, or to bring about change.
The fact that primary producers do appear to be less driven by tax deductions and more interested in maintaining their future income earning capacity is encouraging for the sustainability of the environment and of the industry. Perhaps there is no need for either tax deductions (which are invariably inequitable) or subsidies (which create expectations that become undesirable in the long-term) to provide further encouragement to farmers. This could stimulate producers to consider more efficient means of production if they were to remain competitive and there is evidence that addressing environmental sustainability may actually lead to increased profits in a more market-driven economy.[33]
However, this is an unlikely scenario based on our history. Another approach may be to at least remove the existing tax provisions that are detrimental to environmental sustainability. This should be more effective than introducing new measures to counter old inappropriate measures. Subsidies or direct reimbursements are another possible consideration. They are generally more equitable, better targeted and less costly to administer than tax concessions, but how effective they may be in addressing environmental sustainability is unknown. However, they do foster the expectation of on-going financial support by government and this must influence (and confound) the risk management strategies of primary producers.
Finally, the more pressing issue must be to raise the level of community concern about the environment if there is to be any change in government policy. Ideally, policy changes needs to be pro-active and visionary rather than simply reactionary and without substance. It is clear that policy changes to achieve environmental sustainability are beyond the scope of the Australian income tax system as it has developed. However, at the very least, removal of existing detrimental provisions should be addressed as a matter of urgency if we are to have a sustainable future.
[*] Paper presented at the 4th Annual Global Conference on Environmental Tax Issues, Experience and Potential, Sydney, 5-7 June 2003.
[∗∗] Dr, Faculty of Rural Management, University of Sydney.
[∗∗∗] Associate Professor, Faculty of Economics and Business, University of Sydney.
[1] A Shaw, “Colonial Settlement 1788-1945” in D Williams (ed), Agriculture in the Australian Economy (1990) 1.
[2] D Trewin, 2003 Year Book Australia (No 85, 2003) 530.
[3] ABARE, Australian Farm Survey Report 2001 (Report, 2001).
[4] Trewin, above n 2, 502-503.
[5] “Drought Assistance
Measures 2002-03” available online at:
http://www.nswagric.nsw.gov.au accessed 21/03/03.
[6] Australian Taxation Office, Taxation Statistics 1999-2000 (2002) 9 (“ATO”).
[7] G Lehmann and C Coleman, Taxation Law in Australia (4th ed, 1996) 9; and R Woellner, S Barkoczy, S Murphy and C Evans, Australian Taxation Law (13th ed, 2003) 6.
[8] M Dirkis, “Observations on the Development of Australia’s Income Tax Policy and Income Tax Law” (2002) 56(10) Bulletin for International Fiscal Documentation 522.
[9] For example, see Cridland v FC of T (1977) 8 ATR 69. In this case a university student purchased a $1 unit in a primary production trust and qualified for income averaging.
[10] Treasury, “The Revenue Base: A Summary of the Major Findings of Previous Studies” in P Groenewegen (ed), Australian Taxation Policy (2nd ed, 1987) 123.
[11] R Mathews, “The Anatomy of Tax Avoidance and Evasion” in Groenewegen, above n 10, 103, 111.
[12] Australian Government, “Draft White Paper: Reform of the Australian Tax System: An Overview and Statement of Objectives” in Groenewegen, above n 10, 9.
[13] P Groenewegen, “Tax Reform in Australia and New Zealand” in Groenewegen, above n 10, 152, 166.
[14] Ibid 173.
[15] J Finn, Taxation of Primary Producers in Australia (3rd ed, 1990) 223.
[16] Depreciation provisions have undergone many changes, generally in respect of rates, but more recently depending upon whether or not business taxpayers elect to be taxed under the Simplified Tax System introduced from 1 July 2001. The rules have generally been consistent between primary producers and other taxpayers, so are not explored herein unless they are exceptions to the general principle of writing off capital expenditure over effective life.
[17] F Douglas (ed), Australian Agriculture (6th ed, 1997) 391.
[18] The case of Walker v FC of T 83 ATC 4168 is a good example. Briefly, the taxpayer, a resident in Queensland who had one stud goat being managed interstate, was found to be engaged in a business of primary production and, as a result, able to claim deductions for all related outgoings.
[19] For example, see Howland-Rose & Ors v FC of T (2002) 49 ATR 2006; and Vincent v FC of T (2000) 50 ATR 20.
[20] See M McKerchar, “Current Tax Issues for Nut Growers” (1995) 9(4) Australian Nutgrower 8.
[21] See “Commonwealth
Drought Assistance Overview” available at:
http://www.affa.gov.au accessed 17/03/03.
[22] For example, see media release NR12/2001 by the National Farmers’ Federation available online at: http://www.nff.org.au/pages/nr0l/012.htm accessed 17/03/03.
[23] There has been considerable debate for many years as to whether or not the income averaging system provides any real benefit. See, for instance, L Moon, D Person, P Kokic and R Douglas, “Period Inequity and Tax Averaging Schemes” in D Peterson and N Warren (eds), Rural Income Taxation (1995) 72.
[24] N Warren, “Australian Tax Incidence in 1975-76: Some Preliminary Results” in Groenewegen, above n 10, 80.
[25] M McKerchar, “Financial Self-Reliance for Farmers – A Study of Investment Behaviour” in A Charry and M McKerchar (eds), The Keys to Farm Business Success (1995) MM-(1).
[26] ATO, above n 6.
[27] D Spencer, Australian Wine Grape Production and Winery Intake (ABARE Research Report 02.1, 2002) 5.
[28] W McLennan, Australian Agriculture and the Environment (Report 4606.0, 1996); and Trewin, above n 2, 493-494.
[29] Trewin, above n 2, 496.
[30] S Davenport, “The Role of Income Taxation in Natural Resource Management” in Peterson and Warren, above n 23, 94.
[31] Trewin, above n 2, 498.
[32] Ibid 419.
[33] P Hawken, A Lovins and L Lovins, Natural Capitalism (1999).
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