Australian farmers prize land ownership because it provides security and tenure for the long term. However, over the last few decades farmers have been squashed. Firstly, by stagnant commodity prices and at the same time, from ever-increasing costs of production.
So in order to simply remain viable, farmers must constantly move to more efficient farming techniques, while also increasing the size of their farms.
How we helped
We have been helping Eric and Mary* as clients for several years. The opportunity arose to purchase additional, adjacent farmland. While very excited about the possibilities, Eric and Mary also (naturally) held some reservations and concerns because of the risks and commitment. After all, Eric and Mary’s commitment would be exposed to the unpredictability of seasons. After carefully assessing Eric and Mary’s situation and considering various options, it was evident that using superannuation as a strategy would provide an effective solution to purchasing the land. We showed Eric and Mary that, by using superannuation, the loan principal would be repaid from the contributions made to their fund, from his business. Since their business is able to claim the contributions as a tax deduction, they benefit by using pre-tax dollars to repay the loan.
We showed how, in contrast, paying principal off a traditional loan has no tax advantages and, in fact, must be paid from after-tax earnings. This meant it could cost them up to almost 35% more to repay the initial loan principal than the initial amount borrowed. Superannuation, on the other hand, is taxed at a maximum rate of 15% which is substantially lower than personal or company tax rates.
Because several generations are involved in Eric and Mary’s farming business this allows the opportunity for up to 4 people to have contributions paid into the self managed super so there is a larger pool of savings. Legislation only allows these types of super funds to borrow to purchase assets such as farm land. The overall strategy will save their business a substantial amount of money. (This same principal applies to a business that wants to purchase commercial premises.)
Generally, farmers have a poor attitude to super. Once they’ve seen the tax benefits of superannuation to benefit their family and business, they usually see superannuation in a completely different light!