Primary production aggregation 043-04100000

Primary production assessments are subject to the aggregation rules. All assets used in primary production and all liabilities relating to primary production are aggregated (combined) and treated as if they were one primary production asset and one primary production liability. Primary producers are able to offset the value of all their primary production liabilities against the value of all their primary production assets.

A primary production asset is any asset that is used in the carrying on of the primary production enterprise. It includes any land (excluding any non-assessable homes), machinery, plant or equipment, and stock, etc. used in the business.

For an asset to be regarded as a customer's primary production asset, that asset must be used for the purpose of carrying out primary production. Some assets may be used for both primary production purposes and non-primary production purposes. The decision on whether an asset is primary production or non-primary production must be based on the evidence and should take into account the degree of use for each purpose, whether it is essential to one or the other purpose and the purpose for which it was purchased.

For example, machinery may appear on the balance sheet of the customer's non-primary production business (for example, contract fencing). If the customer demonstrates that it is used extensively in conducting the person's primary production business and there are only occasional fencing contracts, then the asset may be regarded as a primary production asset in these circumstances.

Aggregation applies no matter how the primary production asset is held. For example, a negative amount attributed via an entity could be used to offset primary production assets held personally.

A primary production liability is any liability of the customer that has been obtained for the purposes of running the primary production business. Only the customer's liabilities and assets relating to primary production are taken into account.

For example, a bank loan to a third party, secured by a customer's personal primary production asset, is not a primary production liability of the customer (because it is a liability that is the third party's responsibility). Where a business structure is involved, a loan borrowed on behalf of the primary production business and secured against the customer's farm property will be classed as a primary production liability. The customer's share of that liability will be assessed when calculating the customer's aggregated interest in primary production enterprises.

Note: loans can be regarded as reducing the value of an asset where there is evidence that the loan was obtained to buy that asset. For example, a customer has an unsecured personal loan which was provided for the purpose of purchasing primary production machinery.

An entity primary production liability may be secured against assets not owned by that entity. These assets may be primary or non-primary production related. Where this occurs, the total value of the entity primary production liability is to be recorded on the entity record and documented.

Provided that the entity liability is coded with a primary production percentage on the Trust/Company Liabilities (TRLD) screen, and the other non-entity asset types are recorded correctly on the customer record, aggregation should automatically occur for all primary production assets.

• Add together the value of the customer's primary production assets
• Add together the value of the customer's primary production liabilities
• Take away the total primary production liabilities from the total primary production assets
• If the total value, from all sources and business structures, of all primary production assets less all primary production liabilities equals less than zero for a customer, then it is given a value of zero
• The value of the customer's primary production net assets is added to the customer's other (non-primary production) assessable assets to obtain the total value of the customer's assessable assets for the application of the assets test

The customer does not need to be the primary producer to offset the value of all their primary production liabilities against the value of all their primary production assets. The primary producer can be:

• the customer, or
• a family member of a primary producer, and
• they have primary production assets and primary production liabilities, in their own right

Many wheat and barley growers deliver their grain into a national pool controlled by an organisation (for example, Australian Wheat Board, Australian Barley Board) which sells the grain on behalf of the producers.

When a primary producer delivers the grain he can choose to be paid for it via an advance. If he chooses this option the Board estimates the value of the grain and advances the grower around 80% of the estimate.

The grower enters into a contract with the Board. This contract is recognised as a loan contract. The loan between the Grain Board and the primary producer only needs to meet the general legal definition of a loan, to allow it to be assessed as a liability.

For the purpose of assessing a customer's net assets allow the loan advance, paid by the grain growers board, as a liability.

Other reasons for allowing it are:

• Under primary production aggregation rules liabilities do not need to be held against a particular asset to be allowed
• The advance liability is balanced by various assets such as cash at bank, stock, plant and equipment which the primary producer has purchased with the advance

Apportionment is used where a loan relates to both primary production assets and non-primary production assets, for example, the loan has been obtained to purchase both a farm and the customer's principal home. Only the portion of the loan relating to the primary production asset is used in the aggregation calculation.

Only liabilities and encumbrances secured against (or unsecured ones which have a clear link to) the mixed assets are to be apportioned on the basis of relative value of the exempt and non-exempt asset values.

Where a loan is used to purchase 100% of primary production assets (for example, used to buy a tractor) and the loan is secured over primary production and non-primary production assets (for example, the family home) the liability is still considered to be a 100 per cent primary production liability under section 1121A of the Social Security Act 1991.

Note: refer all aggregation cases to the CAO for an assessment to be done.

Exempt house and curtilage cannot be considered to be an asset used in the carrying on of primary production. Accordingly, if part of the primary producer's liability relates to that house and curtilage, that portion of the liability should be excluded from the total liability. This division of liability between non-assessable home property and business property is apportionment.

Note: apportionment might sometimes not apply, depending on the purpose of the borrowings/liability. Section 1121A of the Social Security Act 1991 only allows liabilities, considered by the Secretary to be primary production liabilities, to be deducted from farm assets. Examples of allowable primary production liabilities might include borrowings to purchase additional primary production land, to purchase primary production plant and equipment, to build structures used for primary production purposes, to repair or maintain primary production plant, machinery, structures, etc. The circumstances of each case is to be taken on its merits, however, in most primary production situations where borrowings are secured by the farm property, including the house and curtilage, apportionment will be applied.

In most normal farming situations, the liability should be apportioned as follows:

• Assume that the value of the whole primary production property owned by the person is $200,000, the value of the house and curtilage is $50,000, and there is a mortgage of $50,000 over the whole property
• The calculation is:
• Value of total property ($200,000) less value of house and curtilage ($50,000) equals the Gross value of primary production asset ($150,000)
• Proportion of $50,000 encumbrance attributable to the primary production asset = ($150,000 x $50,000) ÷ $200,000 = $37,500
• Therefore, net primary production assets (to be aggregated with other primary production assets and liabilities, if applicable) are $150,000 less $37,500 = $112,500

Note: farming properties are often over several titles and it is possible that funds are borrowed against property that does not include the house and curtilage. The individual titles and securities should be confirmed before apportioning any secured debts. Separate valuations by an approved professional valuer might be required in some cases.

In any case where there is a request that the whole of a loan secured by property including an exempt asset (for example, house and curtilage) should be allowed as a primary production liability, refer the details to the CAO. The CAO may contact the Level 2 Policy Helpdesk for assistance.