Transitioning a family farming business to the next generation

We recently advised a couple in their late 50’s on how they could best transition their family farming business to the next generation. From our experience, the most important thing to address first in any family succession plan is the financial security of the parents.  It’s virtually impossible to transition the farm without knowing how the people who are exiting the business will be able to support themselves.  That financial support might include continuing to receive income from the farm or having sufficient investments to be financially secure or the Centrelink Aged Pension or a combination of these.

Of course, to be financially independent of the family farm means that there are sufficient investments and savings to generate the income and capital needed.  This might be possible for some families but certainly not all.

A CentreLink Aged Pension?

centrelink-logoCentrelink can be a solution for those who have little saved but the trick is to know the qualification rules and then arrange your affairs in the most effective way.

The current full rate of Centrelink Aged Pension for a couple is almost $34,000 per year and this is reviewed every 6 months. With today’s interest rates, you’d need almost $1.2m invested at 3% to earn $34,000.

The couple I referred to in the beginning of this article operate a farm with almost 3,000 acres and 2 adult sons eager to join the business.  The parents have a modest amount saved and can’t see how they can plan their exit, let alone allow their sons to be involved in the farm.  If things are tight with one family relying on the farm, there’d be no chance with 3 families.  Their situation was causing frustration in the family because there seemed to be no solutions.  Centrelink wasn’t something they’d considered or thought they might receive.

Qualifying for a CentreLink Aged Pension

We’re certainly not advocating that people aim for Centrelink benefits but for some it could be a part solution or their only option.  To qualify, Centrelink will assess your assets and income.  From Jan 1st 2017 the upper asset limit where no pension is payable reduces to $823,000 and, most farm properties, would be worth much more than this.  However, by transferring the farm assets to the next generation, you can apply for the Aged Pension after 5 years.  This is called the ‘deprivation of assets’ rule.  In this case, timing the transfer is important.  Currently, the age qualification is 65 but will rise to 67 in the next 7 years

There’s still the opportunity to have up to $375,000 in assets with no reduction in the Aged Pension for a couple.  The amount of pension reduces for every dollar of assets over the lower limit and cuts out at $823,000.  Therefore, you can have investments valued at say, $500,000 and still receive a part pension.

The other handy thing for farmers to know is if you have lived continuously in your home on the farm property for 20 years or longer.  In this case, the title isn’t included in the assets test.

The best Solution comes from Communication

We feel that if a farming family is willing to communicate and work together, then there are solutions to make a successful succession of a farm business from one generation to the next.  We’ve helped many of our farming clients to facilitate discussion between family members and help develop an overall succession plan.  In fact, there are some quite amazing results with multiple benefits including resolving estate planning issues and tax efficiency.  Ultimately, what every family wants is harmony and maintaining good family relationships.

instant-asset-tax-write-off
Image courtesy www.ato.gov.au

The May Federal Budget included a popular item for small businesses, which allowed them to instantly write-off a purchased asset worth up to $20,000.  This announcement instantly threw up many questions as to how and when this rule could be applied.

I will try to answer some useful questions in relation to this announcement:

In accounting terms, what does it mean to ‘write an asset off’?

Usually when business assets are purchased, they must be ‘depreciated’, ‘expensed’ or ‘written down’ over a number of years.  Each year this amount of depreciation can be claimed as a tax deduction.  The ATO does not ordinarily allow businesses to claim 100% of the cost of large assets in one year.  When this is allowed it is referred to as the asset being ‘written off’.  By allowing a business owner to write off up to $20,000 of an asset in one year is essentially bringing forward tax deductions that would otherwise be claimed in future years.

Who qualifies as a small business?

A small business is one that has an annual aggregated turnover of less than $2m per year.  It also includes sole traders and partnerships.

What if my business grows above $2m turnover?

The rule applies to the financial year the asset was purchased.  If a business grows above $2m turnover in subsequent years this will not affect what was claimed or written-off in previous years.

Does the threshold include GST?

This depends on whether the business is registered for GST or not.  If the business is registered, the threshold is $20,000 ex-GST, meaning you can claim up to $22,000 when GST is added.  If the business is not registered for GST, then the threshold is $20,000 including GST.

When does the ruling apply?

For assets to fall under the ruling, they must have been purchased between 7.30pm on 12th May 2015 and 30 June 2017.

How are assets that exceed $20,000 treated?

The ruling applies to individual assets purchased up to the value of $20,000.  Assets $20,000 or above will need to be depreciated in their normal fashion.

What about an asset purchased with a trade-in, such as a vehicle?

Only the cost of the asset has a bearing on the threshold – not the value of the net trade in.  For example, if you purchased a new vehicle for $50,000 and traded your old one in for $35,000 the write-off would not apply as the cost of the new vehicle is $50,000.

 

We are not accountants but understand where these rules fit in to a small business.  While tax deductions are nice, our belief is that these decisions should be made with the business’ broader goals and objectives in mind.

Buying farm land using superannuationIt’s hard to fathom but we’re almost half way through 2015 and only a month away before the end of the financial year.  June marks your last opportunity to review and take action on your tax position before we roll over to the next financial year. Come July 1st you start again.

An important part of our financial advice work includes understanding our client’s tax position.  We must be registered with the Tax Practitioners Board, which authorises us to provide limited taxation advice.  This does not make us accountants or replace the need for one as our roles are quite different.  Our scope for providing financial advice goes far beyond that of the accountant to include an in-depth understanding of your current personal financial situation and where you are heading.  In many aspects, this is more important as it gives us a basis for what everyone is trying to achieve.  Once this knowledge is overlaid with your tax position, it gives us a much better opportunity to begin suggesting ways in order to minimise and manage tax.  Tax minimisation could relate to situations that involve personal income, business income, capital gains, trusts and superannuation.  In many cases the result is enhanced when the accountant and financial planner work together in the clients’ best interest.

In a recent example, an accountant we often work with mentioned that one of their small business clients had a large Div 7A company loan, which he had been trying to unwind over a number of years.  These loans are not popular with the ATO and all parties were keen to see it repaid.  We became involved and began asking the client further questions about their future in the business, succession planning and looming retirement plans.  This background research gave us enough of a basis to recommend using their existing super money to buy the business premises and free up the necessary cash to pay out the loan.  All aspects were handled personally and carefully managed to minimise tax and risks to the client.  As you could imagine, both the client and accountant were pleased to see this dealt with before 30 June.

Unfortunately, all too often we see complacency around tax and financial management.  Most, if not all people have an accountant.  Fewer engage with a financial adviser.  The relationship with an accountant is built on trust and respect over many years so they are rarely questioned.

The key point I’d like to emphasise is that dealing with your finances prior to the end of the financial year could save a significant amount of your hard earned income. The longer we have to plan and work with a client before 30 June, the better.

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