Farm Structuring
Farming business structures have changed significantly over the years. Back in the early 1990’s, many farmers operated through a partnership or family trust. Both options have their benefits, but as farming enterprises grow in scale and complexity, many farmers are finding that these traditional structures no longer meet their needs.
Partnerships remain useful, as they allow farmers to fully access tax concessions such as primary production averaging and farm management deposits. However, they also leave individuals more exposed if something goes wrong.
Discretionary trusts also became popular, as trustees could allocate income to different family members each year, helping to manage the overall tax burden for the family.
Today, as farms expand and profits increase, more complex structures are being adopted, including:
- Discretionary trusts (with a corporate trustee) that distribute income to a corporate beneficiary.
- Partnerships made up of a family trust (with a corporate trustee) and a company.
- Standalone trading companies.
Why Consider a Company Structure
Companies are increasingly popular among farmers – and with good reason. They provide asset protection by separating the family business from the land asset, which can safeguard family wealth. They also help mitigate risks associated with unexpected events such as death or disability.
From a tax perspective, companies offer a flat 25% tax rate compared with the 47% top marginal rate for individuals earning over $180,000. Depending on your circumstances, this can deliver significant tax savings.
Potential Downsides
That said, company structures are not without disadvantages:
- Added complexity and higher compliance costs.
- Reduced access to key farming concessions such as farm management deposits or primary production averaging.
- The Australian Taxation Office (ATO) expects corporate beneficiaries to actually receive their trust distributions, not just hold unpaid entitlements. For this reason, we encourage clients with corporate beneficiaries to actively manage unpaid trust entitlements by transferring cash to the company where possible.
How Companies Can be Used Strategically
With the right planning, companies can provide more than just tax savings. For example, you could:
- Use company funds to purchase plant and equipment, then lease it back to the trading entity. The company effectively becomes a plant-hire business, receiving rental income while claiming depreciation.
- Establish the company as an investment vehicle, funding the older generation as they transition to retirement.
- Build an investment portfolio within the company to provide for off-farm children as part of your succession plan.
Most farmers can take advantage of small business restructure rollover concessions, which allow changes to be made in a tax-effective and timely way. However, changing your trading structure is a major decision. It’s essential to weigh the pros and cons carefully and seek advice from your accountant before making any changes.
Contact the team at Lockwood Partners to explore your options and begin the conversation.