When a Large Tax Refund isn't a Good Thing

No one likes paying tax.  For some people, lodging their tax return once a year is a huge worry and causes a lot of stress and concern about how much the tax bill will be.

There is therefore a lot of pressure on accountants to minimise the amount of tax that their clients have to pay and earn them huge refunds. This sounds great in theory…but it may not be in your best long-term interest.

Take farmers, for instance—or primary producers, as they’re known in the taxation world. If you are a farmer, there are a variety of tax minimisation options available to protect you from fluctuations in your income. Let’s take a common example: drought deferrals. In a drought year, farmers may be forced to sell more livestock than they would usually. The idea behind a drought deferral is to allow a farmer to only recognize (and pay tax on) part of the income in their unusually high-income year, and gradually bring in the rest of the income over the next few years.

But that’s the key. The tax refund you might get from deferring your income is not without strings—you do have to recognize and pay tax on that income within 5 years. There are situations where that might make sense—like in the case of a farmer who has destocked so much one year that they are unlikely to recognize much income in the next few years as they restart their breeding program—but there are also situations where that doesn’t make sense. If you are likely to earn a similar amount of income over the next few years, it can be really difficult to bring that deferred income back in, and you’re just setting yourself up for a large, future tax bill. In some cases, you might be able to defer income again in 5 years…but the reality is that you won’t be able to defer it forever.

Farm Management Deposits (FMDs) are also available to help farmers cope with variable incomes. FMDs allow farmers to set aside income, and earn a tax deduction. However, when you want to access that money in the future, you will have to bring it back in as income, and pay tax on it. If your business shuts its doors, the money set aside in the FMD will also need to be brought back in as income, and taxed.

The important thing to remember is that a large tax refund might feel great right now, but it can come back to haunt you. If your accountant promises that they can get you a huge tax refund, make sure that you understand how, and what this means for you in future years.

There is no magic when it comes to tax minimisation. It’s all about careful planning and discussions with your accountant to make sure that you are taking advantage of the options that make sense for you…and leaving aside the ones that don’t.

Contact TDG today to make sure that you have taken advantage of available tax minimisation strategies that won’t come back to haunt you in the future.