Succession and the family farm – A plan for permanence

Deloitte - Agribusiness Bulletin

Type: Article
Knowledge level: Intermediate

Farm Table says:

Good summary of the tax consequences of transferring assets.

This article opens by stating that there can be conflict, confusion, and uncertainty when the time comes to pass on the family farming business, and succession often falls into the “too hard basket”. It is difficult at the best of times because it is much more than just the transfer of assets.

Succession planning is explained as “the development of a plan that will allow a smooth transition of the business and any assets with minimal disruption to the business or, importantly, family relationships.”

Although it can be tough to have conversations about, they must be had, and Deloitte put forward key questions that could be asked about developing a succession plan:

  • What are the needs and aspirations of each family member? Do they see a future for themselves working on the family farm? If so, what do they see as their roles?
  • Does the successor have the necessary skills and experience? If not, what steps need to be taken to develop these skills?
  • If there is no natural successor, what steps should be taken to enhance the value and maximise sales proceeds
  • If there is more than one successor, should the plan treat them equally or fairly?
  • Do I have enough money to retire on? What will be the source of income after retirement? Will it include income from the farm, or should I be self-sufficient?
  • How will the transfer of assets be funded? Can the business support a higher level of debt, if needed?
  • Do the key terms of a buy/sell agreement need to be agreed and documented now, to avoid confusion down the track and in the event that the transfer needs to occur sooner than anticipated?
  • Outside the family, what are the key relationships needed to ensure the commercial aspects of the business?
  • What is the correct structure to hold assets? Should assets be transferred to new/different structures beforehand?
  • If the succession plan requires assets to be sold – now or in the future – then how can the value of those assets be maximised prior to sale? Have the assets been valued and analyzed in the same way potential buyers would?

The article also discusses the tax consequences of transferring assets, which can be substantial. By accessing small business CGT exemptions:

  • The 15-year exemption provides that an entire capital gain is exempt from tax.
  • Allows an opportunity to contribute additional amounts tax-free to a superannuation fund
  • 50% active asset reduction, to reduce a taxable gain by 50%-  This is additional to the 50% general capital gains tax discount, reducing the capital gain by a total of 75%
  • Retirement exemption provides that up to $500,000 is tax-free or can be contributed tax-free to a superannuation fund.

Starting the conversation early and involving professionals is recommended.

Australia - Deloitte - Agribusiness Bulletin
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