SMSF Strategy with Farm Land

Tax and Succession Planning

This strategy has the ability to reduce tax for a number of years and provide for a steady income stream for parents leaving the farm. Obviously there are lots of variations depending on ages and succession planning/taxation objectives.

I will use a case study to best show its effectiveness. The strategy involves the parents transferring land into their own Self-Managed Super Fund (SMSF) and renting to the farming entity

Case Study

Mum and Dad are 62 still farming, though winding down and will be ‘handing over’ in the future to Son.

Son and Daughter in Law are 35.

A parcel of farm land which is transferred from Mum and Dads name into a SMSF (typically Capital gains tax and Stamp duty obligations need to be considered but are usually negligible)

Farm Land Value $2,000,000

Rental/Lease Value $100,000 (Must be market value)

The farming entity would lease the land from the SMSF and pay rent on at least a yearly basis.

The Rental is tax deductible to the farm and tax free to the super fund assuming that Mum and Dad have commenced a pension within the SMSF. The pension from the super fund is tax free to mum and dad, still allowing the farming enterprise to allocate money to them and keeping their own taxable income at low levels.

In this example if the farm had taxable income to distribute of $318,000 (being profit after all tax deductible expenses have been claimed) the tax payable on 4 adult individuals sharing the tax burden would be $73,458.

Using this super and farm rental strategy the tax liability for the year would be reduced to $27,008 – This equates to an average rate of 9.2%

A direct saving of $46,450 per year or $232,250 over 5 years.

Obviously all other tax minimisation strategies are used within this overall plan, for example the use of Farm Management deposits to defer income whilst leading up to setting up this strategy. As Son and daughter get older, their own Super contributions will become a more attractive option.

As Mum and Dad withdraw from the farm completely they have the option of:

  1. Continuing to enjoy the lease income.
  2. Have built up enough ‘other income’ as part of the tax deductible super contributions and off farm investments to
    be self-sufficient.
  3. Have greater ability to allocate assets within super for other non-farming children.
  4. The super fund is in a much better position for an expansion farm purchase having saved these funds in tax.

If you would like to discuss a personalised plan for your circumstances, please give me a call on 9208 1455.

Michael Pedley

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Business Structures

Choosing an appropriate entity to acquire or transfer assets has become increasingly difficult in recent times primarily because of competing tax issues, industry regulation and changing client objectives that may not be supported by the particular entity at the outset.

Typically, the potential structures are: sole trader; partnership, trusts and or a company.

The decision on the structure should consider owner’s immediate and future objectives weighed up with the costs and complexities.

These major considerations will usually include: taxation consequences, simplicity and cost of creating the structure, potential risk of failure of the business, nature and size of the business, potential for growth and the need for additional capital, and nature and extent of control and management required for the business.

Advantages and disadvantages of each structure

Sole Practitioner Partnership Companies Discretionary Trusts Unit Trusts
Asset protection Low100% liable LowJointly and severally liable HighLimited liability to shareholder HighLiability rests with the trustee provided ‘risky’ assets quarantined MediumLimited liability to unitholder
Distribution flexibility None Subject to partner Dependent on shareholders High Dependent on unitholders
Suitability for raising equity None None Yes None Yes
Ability to split income No Subject to partner Dependent on shareholders High Dependent on unitholders
Capital gains tax (CGT) concessions CGT 50% discountSmall business CGT exemptions CGT 50% discountSmall business CGT exemptions, provided conditions satisfied Small business CGT exemptions but not CGT 50% discount CGT 50% discountSmall business CGT exemptions CGT 50% discountSmall business CGT exemptions
Working capital rates of tax Marginal rate Subject to marginal rate of partner Corporate tax rate Subject to marginal rate of beneficiaries Subject to marginal rate of beneficiaries
Access to carry forward losses Yes, no tests required Yes, no tests required Yes, requires Continuity of Ownership or Same Business tests to be satisfied Yes, but requires tests to be satisfied Yes, but requires tests to be satisfied
Access to franked distributions Yes Yes, and if partner of trust, with a family election for >$5,000 Yes Yes, requires family trust election for >$5,000 Yes, requires family trust election for >$5,000 or unit trust is fixed
Ability to succession plan Yes, under will Yes, dependent on partner and partnership agreement Yes under will or hardwiring provisions in constitution Yes under will and an ‘appointor role’ Yes, dependent on unitholder and unitholder agreement

Please Note : Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Business Tax Planning 2014/15

With the reduction in the company tax rate from 1 July 2015, the 2014/15 Federal Budget changes to the top individual tax rate and the indexation of the superannuation thresholds it is a good time to plan ahead for the 2014/15 tax year.

We will provide a more comprehensive article on business tax planning in the lead up to 30 June 2015.

1. Reduction in Company Tax Rate

1.1 Deferring Large Contract Income

With the reduction in the corporate rate to 28.5% effective from 1 July 2015, companies will want to defer their 2014/15 income if possible. This tax planning avenue applies particularly for companies with non-cash/credit card sales or services income.

For example, contracts can be structured so that the services or goods provided can be derived in mid-July 2015 rather than before 1 July 2015.

An additional benefit is deferral of June 2015 BAS payments.

1.2 Deferring Capital Gains

Planned sales of the businesses, or of major assets such as buildings, can best occur in July/August 2015. The small business CGT concessions may be available to eliminate a capital gain if aggregated sales turnover is less than $2.0m, or the net asset value is less than $6.0m. However, if the vendor or vendor controller is approaching age 55, or the small business retirement concession has already been used or is insufficient to absorb the whole capital gain after the 50% reduction, and the 50% discount if an individual or trust carries on the business or owns the related business asset, a deferral of the sales contract time may be in order.

1.3 Accelerating Larger Deductions

2014/15 revenue expenses can be accelerated. Major expense items such as advertising or promotion campaigns, extensive building repairs, as opposed to building extensions or improvements, and major equipment overhauls should be planned and contracted in advance so the tax-deductible contract point, before payment is due, occurs in May and June 2015 rather than in the latter half of the 2015 calendar year.

2. Superannuation Contribution Limits

2.1 New $35,000 Limit

The top tax-deductible concessional contribution threshold has been raised to $35,000 per employee, or self-employed contributor, from 1 July 2014. In addition, the age threshold has been reduced to persons age 49 and over on 30 June 2014, i.e. to people turning 50 in the 2014/15 income year.

2.2 Increased $30,000 Threshold

The lower tax-deductible general concessional contribution limit for individuals not eligible for the higher limit has been raised from $25,000 to $30,000 effective from 1 July 2014.

2.3 Super Guarantee (SG) Requirements

The SG rate has increased to 9.5% from 1 July 2014 and has been legislated.

The quarterly SG maximum salary and wages threshold have been raised from $48,040 to $49,430 per quarter from 1 July 2014.

SC super contributions remain payable by 28 July in the month following the end of the quarter.

If SG contributions are paid in advance, for example due to cash flows or tax planning reasons, the employer can allocate these additional SG contributions towards the SG obligations of later quarters which start within 12 months of the day on which the payment is made.

3. Paying Fringe Benefits to Employees

Fringe benefits provided before 31 March 2015 attract a 47% FBT rate, including the additional 0.5% for Medicare levy, rather than the increased 49% rate to apply from 1 April 2015.

Thus taxable fringe benefits should be considered before 1 April 2015.

4. Paying Dividends to Top Rate Shareholders

With the top individual marginal tax rates rising to 49%, including Medicare levy, from 1 July 2014, and applying for three years, company franked dividends should ideally be reduced so as to keep shareholder taxable income, including franking credits, to less than $180,000 for the 2014/15, and the next two income years.

However, if a higher level of dividends are to be paid, then franked dividends paid before 30 June 2015 will carry a 30% franking credit rather than the lesser 28.5% credit to apply from 1 July 2015. The change in the franking credit rate does have a substantial impact on the total tax for larger dividends paid.

Considering a SMSF?

There is a lot of talk around about setting up a Self Managed Super Fund. SMSF’s are about taking control of your investing and improving returns, so if you’ve got a super balance of $150,000 or thereabouts, and the commitment to ensure your super is maximized, then you are a likely candidate for a SMSF.

SMSF are simply a structure to hold assets within. They are no different to family trusts or a company, with its own set of rules. Basically preferential tax treatment, a condition that it cannot be withdrawn until retirement and rules as to where it can be invested.

The real benefit of a SMSF is the ability to not only own shares and other financial investments but to also hold property (usually a mix). This can be commercial or residential property, but the rules currently only allow commercial property to be transferred into your fund from a member. Commercial property can also be rented (at Market Value) to a members business, whereas residential property can not be used by members or associates.

Tax rules inside a SMSF are very favorable. The Tax rate on earnings is only 15%, tax on Capital Gains held for greater than a year is 10% and all earnings (including realised Capital gains) after a pension has commenced by the member are tax free. Pensions paid to members above 60 who have retired are also tax free making the structure extremely tax effective.

So, with huge tax benefits and a wide selection of investment options, if you take the time to get the right advice a SMSF can be a great wealth management structure. If you would like more info, or create a strategy for your own situation, please feel free to contact the office on 08 9208 1455.