Grain Contracts, Deferred Payments and Cash Flow

For Australian grain producers, the tax treatment of grain contracts with deferred payment terms is strongly influenced by the business’s aggregated turnover, particularly whether it is above or below the 2 million dollar threshold.

Businesses Under 2 Million Dollar Turnover

Primary production businesses with aggregated turnover under 2 million dollars are generally eligible to use cash accounting for income tax purposes.

Under the cash method:

• Income is typically assessed when payment is received

• If grain is nominated to a contract before 30 June but payment is deferred until after 1 July, the income is usually taxed in the following financial year

• This allows tax timing to align more closely with cash flow

For these businesses, deferring payment can be an effective way to manage taxable income in strong seasons while preserving liquidity.

Businesses Over 2 Million Dollar Turnover

Where aggregated turnover exceeds 2 million dollars, businesses are generally required to use accruals accounting.

Under the accruals method:

• Income is assessed when it is earned, not when cash is received

• If grain is nominated to a contract before 30 June, the income is usually assessable in that financial year, even if payment is deferred

• This can result in tax being payable before cash is received

Nominating Grain After 1 July

Delaying nomination of grain until after 1 July will generally result in the income being assessable in the following financial year for both cash and accruals taxpayers. This can be a useful strategy in years where taxable income is already high and there is a desire to defer tax.

However, delaying nomination may involve commercial or pricing trade-offs, which should also be considered.

Cash Flow Implications

Regardless of business size or accounting method, deferring cash receipts to manage tax outcomes can create short-term cash flow pressure. While tax may be deferred or managed, day-to-day expenses continue and input costs such as seed, fertiliser, fuel, wages, and contractor payments often need to be paid well before cash from grain sales is received.

Where deferred payment strategies are used, it is important to ensure there is sufficient working capital to cover these costs. In many cases, this may involve reviewing or increasing working capital facilities to fund inputs and operating expenses during the gap between delivery and payment.

This is not a tax issue, but a funding one. Discussing these strategies with your broker allows working capital facilities to be structured appropriately so tax planning decisions do not unintentionally restrict operations.

The Key Takeaway

The tax implications of grain contracting decisions differ depending on whether a farming business is above or below the 2 million dollar aggregated turnover threshold. At the same time, any strategy that defers cash receipts will have cash flow implications that need to be planned for.

Professional advice is essential. These decisions should be made in consultation with your accountant to confirm the correct tax treatment, and with your broker to ensure working capital facilities are structured to support the strategy.