Rural succession planning is currently a major focus for the Australian agricultural sector. The drought and current turmoil in commodity markets has resulted in a reduction in revenue and therefore profits for many farmers, but with no less effort – and many would argue more effort required to generate it. This extra effort places stress on the person on the land.
Consistent with the broader Australian demographic, the average age of farm owners is increasing, now anywhere from 52–56 years of age, depending on which survey you rely on. Thus, over half of Australia’s rural enterprises are owned by Baby Boomers e.g. those born between 1946 and 1964. Whether they like it or not, these Baby Boomers are reaching an age where they need to consider retirement and, more importantly, the transfer of their rural enterprise to new owners, whether they are family or others. However, we believe that farm owners are largely unprepared for this inevitable transfer of wealth. In our experience, farmers encounter a number of fears and uncertainties in the succession planning process, including:
- what is it going to cost for professional advice?
- will the tax and stamp duty costs be prohibitive?
- how will I find time to implement a succession plan?
- who will I sell the farm to, how, and for how much?
- if I give the farm to one or more (but not all) of my children:
- how do I provide for my retirement?
- how do I provide some equity in my inheritance for all of my children?
- where do I start?
The key messages are:
- don’t be scared off by the tax and other costs of the succession planning exercise, and
- don’t try to work through the succession planning process yourself. Make sure that you engage a team of advisers who have experience in helping clients through the rural succession planning exercise.
You should focus on the commercial aspects of your succession planning, and let your advisors worry about the revenue implications. In reality, capital gains tax (CGT) may not be a major hurdle to any succession planning exercise now because of the availability of CGT rollovers and small business concessions, discussed below.
START PLANNING NOW
The best laid succession plans are made several years in advance of the actual transaction. Farmers who may wish to implement a succession plan some time in the future, should commence the process now.
The succession planning process can be addressed by using the following steps:
- what is the existing ownership?
- what is the commercial transaction?
- what is the best legal structure going forward?
- explore options to get from (a) to (c), having regard to:
- stamp duty
- income tax
- asset protection and other legal issues
- decide on a strategy, and
- implement the strategy.
Consider the existing structure of the business e.g. a sole trader, partnership, company or trust. Is the existing structure designed to allow maximum access to the small business CGT concessions and provide asset protection?
If the business is operated by a family trust, it is not possible to introduce other equity holders into that vehicle, and so it will be necessary to restructure. For example:
- the business could be rolled over into a company using the CGT rollover relief in Division 122A of the 1997 Tax Act. This defers any capital gain until sale of the business by the company or sale of shares by the family trust, or
- alternatively, it may be sensible to access the small business CGT concessions now, to obtain an uplift in the CGT cost base of the business, and of the family trust’s equity in that entity.
CAPITAL GAINS TAX CONCESSIONS
It is a common misconception that ‘half of anything I get for the business will be lost in capital gains tax’. This is seldom, if ever the case.
All taxpayers, other than companies, are entitled to a general 50% CGT discount on the sale of a business (including farm land and improvements), as long as the business has been held for 12 months or more. Companies might be significantly disadvantaged by not being able to access the 50% CGT general discount, if the small business CGT concessions don’t allow for a similar outcome.
The small business CGT concessions have been expanded considerably since its introduction around 15 years ago. While the situations where the concessions can be accessed have increased dramatically, which has provided a significant potential tax saving for small businesses in Australia, the complexity of the provisions has increased proportionately. As a result, there are often a number of intricacies to be aware of and conditions to be satisfied, in order to access the concessions.
It is important to seek advice on the requirements which may need to be satisfied, well in advance, to ensure maximum access to the small business CGT concessions.
A critical threshold issue for accessing the small business CGT concessions, is whether the net value of the business assets of the relevant advisor and their ‘family group’ are less than the $6 million threshold. The test looks at the taxpayer, ‘connected entities’, and ‘affiliates’. The rules for determining who is a connected entity or an affiliate are quite complex. In some cases, taxpayers who may be close to the $6 million threshold, may need to determine which entities are and are not connected, and that may have a critical bearing on access to the concessions. Hence the need to take advice on the concessions well in advance.
A very useful alternative to the $6 million net assets threshold, is a $2 million turnover threshold. If the turnover of the farming business is less than $2 million in the relevant financial year, then the business entity qualifies as a small business entity, with access to the small business CGT concessions. This is regardless of the net assets of the taxpayer and connected entities and affiliates. This turnover test allows a much larger group of small business taxpayers to access the concessions.
Smart farmers have already devised a business succession plan, and have sought advice on the legal and revenue implications of the different ways of achieving their plans. They have discovered to their pleasant surprise, that the CGT implications of the restructure are generally considerably less than they thought and are certainly not such as to be prohibitive.
Smart farmers don’t procrastinate, they consider their alternatives, obtain advice, and implement a plan which provides maximum benefit to them.