NORTHERN Victorian irrigators being paid for on-farm upgrades have been warned to seek financial advice or risk a hefty tax bill.

There is confusion among irrigators and tax advisers about whether payments made to irrigators to modernise their irrigation systems, as part of the $1 billion Northern Victoria Irrigation Renewal Project, will count as income and be taxable.

  • Should NVIRP on-farm upgrade payments be tax-free? Have Your Say  now in the form below

The amounts paid to farmers vary from a few thousand dollars for the removal of Dethridge wheels, to a few million dollars for irrigation work.

The project involves modernising and rationalising channels, with farmers compensated for the water they save and the on-farm work.

NVIRP spokeswoman Merrill Boyd said farmers had been receiving incentive payments for many years from differing organisations and the NVIRP payment was similar.

She said NVIRP had not been advising farmers about the tax implications of accepting the money.

"We do not presume to provide advice but we encourage all landowners to seek advice, both legal and accounting advice, specific to their enterprise and we include up to $1000 for them to seek that advice," Ms Boyd said.

She said the $1000 was for legal and financial costs so farmers were not out of pocket.

Bunbartha fruit grower Jamie Craig, who has been through the irrigation-upgrade process, said it was crucial irrigators sought advice from their accountant or tax adviser before the transaction was made.

"The tax issues might be something that is very grey," Mr Craig said.

"If it was clear then NVIRP would have an opinion on it."

Mr Craig said the payments could have capital gains or income tax implications.

"There's no point in saying 'I thought I was getting $100,000 in my back pocket or added to my bottom line' without getting advice first," he said.

Bendigo accountant John Stewart said it was important to get an equitable tax position for the people involved in the project, which may involve changes to tax legislation.

"I would suggest the income should be assessed over the period in which the deductions are available," Mr Stewart said.

"We've made representations to our local member of parliament about the issue."