Structuring farm purchase

We are planning to purchase acreage in the country and eventually retire there. What's the best structure for the farm puchase in that instance and when you can/have to call farming activities as business not hobby in Tax purpose. Is there any general rule for it? We are planning to put some livestock on the property, but at least in the beginning we will have day to day jobs as well.

What's the best structure for the property purchase e.g. Buying under own names or trust? The current plan is that the farm will be PPOR immediately. Also are farming businesses generally operated under trusts or some other structure?

 

Complex stuff. Only 2 hectare could be CGT exempt if living there. Land tax issues need to be consider as well as stamp duty and succession issues. Primary producer status will affect things.

Not as simple as saying 'a trust'.

 

Thanks Terry, I knew that it is complex matter and I do not even know where to start my thinking.

I knew about 2ha rule, but I (naively) thought that farms, if PPOR, are land tax exempt in Victoria. But would not be the first (or last) time that I am wrong .

I even thought to buy a property under personal names but lease it (commercial rate) to the trust which operates the business on the farm. Does that 'wild idea fly'?

 

Depending on cost and super balances a SMSF may even be a suitable structure.

Now I imagine some people will read this as say "WTF". How can he say that. Well there is a exemption from the sole purpose test and it relates to farms. The famer can live on the farm his SMSF owns in its simpliest form. Where the area of the homestead is less then 2Ha in some instances a SMSF can own the land. Rent is paid by farmer to the SMSF...You may not want to operate an agri business in a SMSF but its also possible. I have seen grape vines and other crop producing trees in a SMSF. Lots to the advice needed to do this I will caution. This can offer a range of benefits incl tax concessions, land tax concessions and even exemption. The SMSF may even mirror the CGT exemptions BUT it will come with some catches....You don't want to die on the farm without a reversionary pension for example.

I'm with Terry - Don't wander in assuming ' a trust ' is a great idea. A SMSF is just one example of a trust. All options have to be explored and the merits of each assessed across an incredible array of alternatives incl legal and estate matters.

 

The land will be exempt from land tax if it is "primary" production land.

"primary production" means—


(a) cultivation for the purpose of selling the produce of cultivation (whether in a natural, processed or converted state); or


(b) the maintenance of animals or poultry for the purpose of selling them or their natural increase or bodily produce; or


(c) the keeping of bees for the purpose of selling their honey; or


(d) commercial fishing, including the preparation for commercial fishing or the storage or preservation of fish or fishing gear; or
s. 64


(e) the cultivation or propagation for sale of plants seedlings mushrooms or orchids;

 

Sorry I couldn't work out how to quote - thats from the land tax act vic.

You may even want to consider purchasing jointly with a trustee and partition the land so that the personal names own the 2 hectares surrounding the house.

 

Certainly Paul, you surprised me. Superfund did not even cross my mind. When thinking it now I can see advatages with the structure for many people. But for us I am not sure that we want to tie more capital under 'super' structure and not planning to change current super schemes. I am only 40 so it takes a long time before I can withdraw anything from super and if some reason we change our mind and want to sell the farm and move back to the city within the next 20 years, I am not sure how I can get investment / capital out off super.

 

Thanks Terry for digging this out. Our plans definitely would fit under this section.

 

Make sure you get legal advice as the land tax will depend on where the property is located - different rules if close to melbourne for example.

 

That's also novel idea for me and definitely something to explore further. How legally partition happens? Do you just own the farm as tenants in common and draw agreement between parties about partition and tax office accepts that?

 

Zillions of thanks for the hint. The areas that we are interested in looks like to be outside or greater / urban growth area of Melbourne.

 

Take care with primary production land. Its also possible the farm is subject to land tax if its not USED correctly. Just cause its a farm doesnt make it exempt. Good example is a farm with agistment - Taxable. A farm with 40% agistment, 30% olives groves freshly planted for crops in a few years and 30% stock. Its also taxable.

 

That's a good point. Our purpose is 'genuinely' try to drive income from the land. Naturally depending on the quality of the land, but initially we were thinking to have livestock.

Based on your examples I have to say that state revenue office was really harsh, if land tax applied for the last example.

 

Have a look at the legislation
s 65
http://www.austlii.edu.au/au/legis/vic/consol_act/lta200590/s65.html
"used primarily for primary production"

ie. the main thing must be primary production. And other use incidental

 

Definitely has to keep in mind when forming a structure.

Just to clarify even if we are planning to drive supplementary income from farming activities, farming is not going to be our 'main' income source. Hoping that it would assist with rates and property maintenance cost. Can farming activities classified as hobby in this instance in income and GST purpose?

 

If you are making a profit from farming then it would be taxable. But there are various concessions which could be had if you qualify as a primary producer.

But from a land tax perspective it doesn't matter if it is your main source of income or not, what matters is what the land is primarily used for. You could still have a full time job but have the land primarily used for primary production.

 

Thanks Terry for your help. Highly appreciated. You gave me a lot of think about and definitely will seek professional help when finding a right property.

Actually yesterday we found a property that we really liked. Current owner was running lifestock as well as there are some grapevines on the property. According to section 32 he did not pay land tax, but the property is under his personal name.

If getting private producer status for income tax purpose, can you deduct initial tax losses against your PAYG income before income starts to flow in a couple years later? Or do you carry losses forward and deduct from profits in the future

 

I don't know much about primary producer income tax law but there are various rules in relation to business losses offsetting other income. There are also differences in the way primary producers are taxed so that they can average their income over 4 years (or so) to help with the great fluctuations they encounter - huge gains one year, losses in another.

 

Tillie - The tax losses issues aren't straight forward for primary production land. Year ago when the non-commercial loss rules came in I ran a objection that was a test for the ATO. They were unsure if ALL primary production was the same. eg wheat, barley, sheep, cattle and what happens if some is viticulture or even turf farming... Could one activity make a profit and others not ? If so how would the primary production loss exception apply ? Also some of those aren't primary production activities but are on PP land. And its not uncommon for land use to change eg cattle for a few years then crops etc.

I would suggest personal tax advice in respect of the intended acquisition that covers structure, land tax, income tax and losses etc. Also that addresses how certain deductions can be claimed eg : fencing, horticulure and vines, irrigation, land dams etc The impact of PP (primary production) averaging may address the issue of seasonality and losses in any event.

 

Easier said than done!
Primary production status doesn't just rely on income or the size of the land. I have a PAYG job but claim losses through our farm, based on aspects like turnover, the scale of the enterprise and the intent to make a profit. I'm sure it's much more complex than that but we work with our accountant to make sure it always remains a ligitimate primary production enterprise - FYI we're currently running about 70 cattle and are GST registered