The Farming Advantage with Tax Planning: Using Tax Strategy to Build Wealth, Cashflow & Security
- Future Accounting
- Jan 12
- 6 min read
Updated: 3 days ago
Written by: Chris Mulcahy
How the farming advantage with tax planning strengthens Cashflow and Succession
Using the Tax System to Create Wealth
A tax problem is a good problem – as long as you have a strategy to manage it and use it to your advantage. Farming is a unique industry that allows tax to be used as a tool for future security, wealth creation and long-term planning.
Most farmers dislike paying tax, and many end up spending money just to save tax, placing pressure on cashflow, working capital and overall financial stability. In many cases, a farmer spends a dollar to save only 10–20 cents.
But imagine paying tax with the confidence that you can claim it back later if/when times get tough or strategic taxation planning opportunities are available.
A system where you:
Pay tax when profitable,
Preserve cashflow, and
Recover that tax in low-profit years or when major opportunities arise.
Convert tax to a recoverable asset rather than a lost cost.
Dividend imputation allows exactly this.
Planning for Long-Term Farm Ownership
Your goals are clear: reduce debt, build equity, and expand when the right opportunities present themselves. Strong business profitability sitting alongside a developing farm enterprise gives you the cashflow strength and financial resilience to achieve these goals.
With interest rates easing and farmland supply stabilising, now is a prime moment to set a strategic pathway.
How Farming & Tax Planning Work Together
Farming is unique: income fluctuates with the seasons, working capital needs vary, and large upfront costs can create significant early-year losses. These characteristics—combined with generous tax concessions—allow farmers to use the tax system strategically to support growth.
Loss years in particular provide an opportunity to release franking credits that were built up during profitable business years.
Key Tax Tools Available to Farmers
Farming enterprises can use several high-impact tax tools:
Income averaging
Depreciation and capital write-offs
Company dividend imputation system
Farm Management Deposits (FMDs)
Superannuation & SMSF planning
This document focuses on dividend imputation and how to use it to your advantage.
Understanding Dividend Imputation
When a company pays tax, that tax payment is added to its franking account.
When the company later pays a dividend, it can attach the tax already paid as a franking credit.
How it works
Company pays tax → franking account increases.
Dividend paid → franking credit attached.
Shareholder receives the credit → reduces tax payable.
If the credit exceeds tax payable → cash refund is issued.
In contrast, when individuals pay tax, the tax is gone forever.
The Value of a Tax Deduction
A deduction only saves tax equal to the taxpayer’s marginal rate. If an individual’s average rate is 18%, spending $100 saves $18 in tax → the real cost is $82.
Farmers often spend purely to reduce tax, which can weaken cashflow, especially in high-working-capital years.
In a company taxed at 25%:
Pay $25 in tax
Keep $75 in the company
And potentially claim back the $25 in a future low-income year
This makes corporate tax a recoverable asset rather than a lost cost.
Example: How Dividend Imputation Works Over Time Using a 25% tax rate and correct franking credit calculations
Item | Year 1 | Year 2 | Year 3 | Year 4 |
Company Net Profit/(Loss) | $600,000 | $400,000 | $500,000 | $400,000 |
Company Tax Paid (25%) | $150,000 | $100,000 | $125,000 | $100,000 |
Franking Account – Opening | $0 | $150,000 | $250,000 | $275,000 |
Franking Account – Closing | $150,000 | $250,000 | $275,000 | $291,667 |
Farm Trust Trading Profit/(Loss) | $50,000 | $50,000 | $(400,000) | $(200,000) |
Dividend Received | – | – | $300,000 | $250,000 |
Franking Credit Attached | – | – | $100,000 | $ 83,333 |
Trust Net Profit | $50,000 | $50,000 | $0 | $133,333 |
Distribution to Beneficiaries | $50,000 | $50,000 | $0 | $133,333 |
Franking Credit Refund | – | – | $100,000 |
$ 63,333
|
How the franking account moves:
Year 3: 250,000 + 125,000 − 100,000 = 275,000
Year 4: 275,000 + 100,000 − 83,333 = 291,667
This correctly reflects a 25% tax rate.
Using Dividend Imputation to Your Advantage
Dividend imputation is a medium- to long-term wealth strategy, not a short-term tax trick.
If the business continues to generate strong profits and your long-term goal is farmland acquisition, this strategy helps:
Preserve cashflow
Recover tax paid in earlier profitable years
Strengthen borrowing potential
Support the business during loss seasons or expansion years
Provide tax refunds precisely when cashflow is tight
This strategy works whether you own, lease, or share-farm.
How This Strategy Supports Succession Planning
A strong tax strategy is one of the most effective tools for smooth farm succession.
Dividend imputation assists succession by:
Building and stabilising cashflow
Cashflow is essential for:
Supporting retiring family members
Funding equity transfers
Reducing debt pressure on the next generation
Turning tax into a future asset
Franking credits carry forward until needed—often during:
Loss years
Restructure years
Generational transition years
This provides refund buffers during crucial periods.
Strengthening superannuation
Superannuation grows off-farm wealth that:
Funds retirement
Reduces reliance on selling farmland
Simplifies intergenerational transitions
Reducing individual tax exposure
Keeping profits taxed at the company level avoids excessive individual tax liabilities that complicate succession.
Building resilience
A business with tax credits, strong cashflow and diversified wealth is far easier to transition successfully.
Farm Management Deposits (FMDs)
Useful — but must be managed carefully
We see many farming families relying on Farm Management Deposits (FMDs) as their primary tax planning tool. While FMDs are designed to help smooth primary production income, using them in isolation—rather than alongside the broader range of available tax planning strategies—can create ongoing tax issues. FMDs can be highly effective, but excessive or unbalanced use can also introduce risk.
Benefits
Tax-deductible when deposited
Taxed on withdrawal
Smooths income fluctuations
Up to $800,000 per person
Creates a cash reserve if used well
Risks & Limitations
Not available to companies or trusts
Large balances can trigger major tax bills when withdrawn
Normally must remain deposited 12+ months
Interest is taxable
Withdrawals increase average tax rates
Balance is fully taxable in the year of death
Not a succession planning tool
Can reduce working capital when over-used
Recommendation:
Use FMDs cautiously and only at levels where future withdrawals can be managed without cashflow strain or excessive tax.
Next Steps
We recommend reviewing this medium and long-term planning alongside your annual tax decisions. Use the various tools and levers available to manage tax as part of your overall planning – cashflow, succession, debt reduction, aged care.
Model future farm cashflow and profitability
Consider tax traps – trading in equipment with a low written down value
Review structure to confirm access to the dividend imputation system
Test dividend imputation and franking scenarios
Integrate superannuation and FMD strategies
Build a structured plan to use tax to increase equity and resilience
Convert tax to a recoverable asset rather than a lost cost
Final Thought
Long-term success in farming relies on the Three P’s: Preserve, Protect, and Prosper.
Profitability is critical, but cashflow is the lifeblood of every farm. Sound decision-making is never based solely on tax — tax should support your goals, not dictate them.
Strategic use of the tax system, especially dividend imputation, allows you to pay tax when times are good, preserve cashflow, and reclaim that tax when profits are low or opportunities arise. This transforms tax from a burden into a financial safety net that strengthens your farm’s future.
This is the essence of the Farming Advantage with Tax Planning, paying tax when times are strong, preserving flexibility, and reclaiming value when conditions tighten or opportunities emerge.
With clarity, planning and discipline, your business can continue to Preserve wealth, Protect your family’s future, and Prosper across generations.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
