Working in a family agricultural business comes with a multitude of challenges and, for many farmers, the primary focus for the business is on achieving viable increases in production levels to maintain a sustainable business. But you should also consider how changes to your family could affect your business in the future and, in particular, whether your business structure is still appropriate for your needs and goals.
The business structure that your farming business was built upon may no longer be suitable. As your business has evolved, it is most likely that the complexity of your business needs has increased, along with changing family dynamics. It might be time to review your business structure.
Your current business structure may mean you are missing out on tax efficiencies, are exposed to unnecessary risk or may face difficulty when it comes to planning the transfer and management of the business to future generations. As your business grows and matures, it’s important to consider how the business can be transitioned through a succession plan.
Why you should review your business structure
#1 Protection of assets
As your personal and business assets grow and interests of your farming business become more complex, it may be time to consider separating your personal and business affairs. A sole ownership or partnership business structure may have served the business well for decades, however the benefits of these structures may be less attractive as your family evolves. These structures also have the disadvantage that the owner or partners’ personal assets are fully exposed to creditors. Further, in a partnership situation, each partner may be held liable for debts incurred by the other.
Typically a company structure means that shareholders’ assets are more protected through separation of shareholding and directorship. Generally shareholders will only lose the value of their shares without being liable for the company’s debts. Directors also have some level of protection, however they may be held personally responsible if they have provided a guarantee or have allowed the company to trade while insolvent.
Other business structures may be more appropriate for farming businesses with larger and more involved operations. A Discretionary Trust or Unit Trust separates the liability of the business and offers asset protection for the Trustees’ personal assets.
#2 Succession planning
Considering the need to transfer the management of your farming business to the next generation is often the trigger for farming families to review their business structure. When it comes to succession planning for family and agricultural businesses, there are many complexities that need to be taken into account. These include protecting the farm from family disputes or divorce / de facto relationship breakdowns, considering the retirement needs for older generations, taking into account estate planning wishes, providing for children who are not directly involved with the business, and recognising the value of all prior contributions into the business (paid or unpaid) and missed opportunities.
As families evolve, the need for a business structure which considers changing family dynamics becomes more important. While a partnership may work well for a simple ‘Mum and Dad’ style business, this structure does not provide the most effective vehicle to bring children and their spouses on board. There may be further complications if one of the partners retires or dies, which could result in unplanned tax liabilities for the remaining partner/s.
In many cases a combination of structures may provide the most flexible option. This enables the trading entity to operate independently of the land owning entity, adding an extra layer of protection to each side of the business. The more complex the structure arrangement the higher the establishment and ongoing costs. These must be measured against the benefits gained overall.
A Discretionary Trust or Unit Trust can be more effective structures when considering the succession planning needs of farming and family businesses. Some of the advantages of trust business structures include:
- Assets can be owned on behalf of the family rather than by specific individuals and assets or income of the trust are managed under the discretion of a Trustee. This means the Trustee has flexibility in how assets and income are distributed amongst family members. For example, family members may enjoy a share of profits from the family business without owning or being entitled to the assets;
- Trust structures allow for a transition for handing over the business where, for example, parents may hand over the running of the business while still maintaining control of assets. This allows for assets to be protected while transferring control of the business to the children who are managing it;
- Trusts can also be advantageous when it comes to estate planning, with trust deeds protecting the business from disputes relating to a deceased estate, effectively protecting the business for beneficiaries who are involved in the day to day running of the business;
- Discretionary Trusts can also make it harder for an estranged husband/ wife/ partner to make a claim against a farm as they will be competing with the other beneficiaries (i.e. their entitlement is not easy to define);
- Trusts also keep assets outside of a deceased’s estate, meaning that the chances of estranged/ non-farming family members making a challenge against the estate (Inheritance Family Provision Claim) are minimised.
There are other financial strategies that can also be considered for succession planning. For example, your life insurance policies may be written to distribute entitlements outside of Trust structures to consider the needs of beneficiaries who are not directly involved in the farming business.
#3 Tax efficiencies
Implementing the most suitable business structure can create tax efficiencies throughout the life of your business. As your farming business grows and new generations become involved, you may need to look at structures which provide you with flexibility, including:
- The ability for income splitting to reduce tax liabilities for involved parties;
- Moving away from marginal tax rates with the maximum tax rate of 47% plus Medicare levy through to a flat tax rate of 27.5% (or 30% depending on turnover);
- Implementing more flexible arrangements such as the possibility to vary distributions annually;
- Creating the ability to distribute gross income which allows individuals to recoup personal losses and meet their own tax obligations; and
- Utilising a business structure which will allow for primary production concessions such as Farm Management Deposits (FMDs). As FMDs can only be held by individuals, agreements must be in place to ensure the business still has access to these reserves.
When reviewing your business structure, it’s important to consider tax implications such as:
- owner’s benefits being subject to CGT;
- Being subject to higher levels of state tax (i.e. land tax);
- CGT implications, e.g. main residences not being exempt when purchasing farming property.
Most business structures provide access to CGT discount and small business CGT concessions, when conditions are met.
What are the business structures which may apply?
Sole ownership/sole trader: An individual person who has both legal and beneficial ownership of the assets related to the business.
Partnership: Individuals who have entered into a Partnership Agreement to carry out business activities, jointly benefiting from income derived from the business.
Joint Venture: A special purpose entity. As with a Partnership, a Joint Venture has no legal identity which is separate from its equity holders.
Company: A legal entity which can be a Body Corporate or an Unincorporated Association or Group.
Discretionary Trust: A Trust where the Trustee, under the powers of the Trust, controls the assets of the Trust and can use discretion when distributing income and capital between the beneficiaries of the Trust. The Trustee may be a Corporate Trustee (proprietary limited company) to limit liability to individuals.
Unit Trust: A Trust in which members vest property in return for units. A Unit Trust is governed by a Trust Deed establishing beneficiary entitlements fixed by the unit held. Each unit holder has control over their units in the Trust and income generated by those units.
Next steps
There are advantages and disadvantages associated with each different business structure. Some structures are difficult to vary once established. Additional establishment and administration costs need to be taken into account and restructuring may also have CGT implications. This is why it’s important to seek advice to understand the options which may be most appropriate for your family circumstances.
Working in collaboration with other aligned professionals, including your lawyer and accountant, we specialise in providing a holistic view of your business to identify solutions which can assist in achieving your business goals and objectives.
A well set-up structure can benefit your business, and can also be an efficient vehicle for succession planning, retirement planning and estate planning.
If you would like more information about business structures that may be appropriate for your agricultural business, I invite you to contact me today on 08 8253 2906 or email info@financialservicessa.com.au.
This advice is provided by Phillip Dibben under Financial Services SA rural business consulting services.
Phillip Dibben is an MFAA Approved Credit Adviser, including SMSF lending, and is an Authorised Credit Representative with Riverland Lending Services Pty Ltd, ABN 37 1415 814 080 ACL 391835, and is licensed to provide advice in all consumer and business loans including equipment finance. All loans are subject to lending and approval criteria.
Phillip Dibben is also a financial adviser at Active Financial Management. Active Financial Management and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306 trading as Fortnum Financial Advisers.
This information does not consider your personal circumstances (including taxation) and is of a general nature only. You should not act on the information provided without first obtaining advice specific to your circumstances.