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Bad years on the farm are hard to take, but there are often opportunities for positive outcomes in the areas of tax and succession planning that can be beneficial to agribusinesses.
Variable farming conditions have delivered a wide range of harvest results, while livestock businesses continue to be tested for profitability with pressure on feed and water. However, that doesn’t mean farmers should overlook tax and succession planning options. Unfortunately, farmers who missed out on critical rainfall or suffered frost and other damage are likely to have very low incomes and suffer substantial financial setbacks.
But let’s not dwell on the negatives.
Succession planning opportunities
Opportunity may arise to undertake valuable succession planning. Accessing small business capital gains tax concessions requires business turnover under $2,000,000 or net business wealth under $6,000,000. A poor year may see farmers fall within this range (where they may not otherwise have been), allowing the movement of farmland between generations with potentially no capital gains tax.
Further, cash in farm management deposits (FMD) may be withdrawn for income tax purposes with little tax impact. If farmers have a company structure that has paid tax, dividends from retained profits may be paid out to family members, offsetting farm losses and allowing them to receive a substantial refund of dividend imputation credits (great for cash flow).
Review timing of sales
Before storing grain to be sold post 30 June, farmers should review estimated tax positions and consider timing of sales to optimise tax positions in the current and future year.
Planning for the future
Superannuation contributions are vital to succession and retirement plans, exit strategies and family estate plans. Building this critical asset should not be overlooked in tough years. With good planning and cash flow management, the tax benefits of such contributions can still be achieved.
Proactive planning measures and tax-effective reserves
Disposal of off-farm assets (shares and property) with large unrealised capital gains may be possible during low-income years. Consider realising profits, changing investment exposure, accessing capital for debt reduction, or retirement plans not previously viable due to high tax rates.
These and other proactive planning measures will ensure farmers capitalise on good planning done in prior years and take the opportunity to obtain maximum tax benefit when they return to profit next year.
The year wasn’t as bad as expected
At the other end of the farming profit spectrum, those fortunate to have weathered tough seasonal conditions should continue to build tax effective reserves, including through FMDs, superannuation, and by accessing corporate tax rates (25%) that may alleviate current tax problems.
Asset change-over
We are now aware that generous asset full expensing rules have ceased, leaving the sector exposed to potential profit on disposal or trade of high value equipment. The timing of asset change-over is now a relevant consideration for tax planning in both high and low income years.
One thing is for certain, careful planning is essential to maximise the benefits of every financial circumstance, no matter what the season may bring.
FOR MORE INFORMATION
For more information, don’t hesitate to get in touch with your local RSM office.
