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
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:
- Continuing to enjoy the lease income.
- Have built up enough ‘other income’ as part of the tax deductible super contributions and off farm investments to
- Have greater ability to allocate assets within super for other non-farming children.
- 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.