The Great Debate; Drawings or Wages

 

Article by Brant Jansen

as featured in the Farm Weekly issue 14 October 2021

SHOULD I pay our family farm member a wage or cash drawing? This was a popular question readers posed to us after reading Eamonn Lanagan’s Farm Weekly article “Pay up”. Our response, “it depends… each family business is different, in its structure, in its people, and in its dynamics, let’s talk about this and we can come up with a solution fit for purpose”.

Even though this is a genuine sit on the fence response, we can provide readers with some general observations on what our broadacre clients are doing.

Sometimes, when a young family member first returns home to the farm, they are unsure of what they want to do, and without them yet making a long-term commitment to the business, we see some growers pay a wage rather than cash drawings. This is borne out of simplicity and will in the most part be an annual salary rather than hourly rate. Tax is withheld, super at the newly prescribed 10% rate is paid, workers compensation insurance extends to the child, and he or she is granted standard leave entitlements, to name a few of the typical characteristics of employment.

As the young farmer makes a firmer commitment to the business, a transition can be made to drawings, with no tax withheld, and no superannuation guarantee. This transition is necessarily dependent on the business trading structure and is afforded trouble free to those who have a family trust in their structure. For other business structures, it requires some more re-organisation and planning.

For those family members on cash drawings, the farm business typically pays for expenses such as utilities, phone, health insurance and vehicle costs. The payments are generally tax effective to the business, and in most cases trust allocations lead to significant tax savings via primary production averaging and other concessions.

Commonly though, family tax benefits for the young family can go missing with large trust allocations. Superannuation guarantee obligations are no longer mandated. Income protection policies are considered, however often set aside due to cost.

The substantial issue with a transition to drawings is around understanding of the economics, what benefits are forgone, and which are picked up. This can be a significant issue in the eyes of the younger generation. In a recent podcast published on Farms Advice, I spoke about the differences between $800/week drawings, plus typical benefits, versus a wage of $1,150/week. Tune in to this to find out which is better.

My take home message to family-owned farm businesses, is to put pen to paper, with the help of your accountant, accurately calculate the package and discuss this once a year to ensure everyone in the business is on the same page.

To discuss this article further, we encourage you to contact Brant Jansen  on (08) 9621 3200, or your Byfields accountant.

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

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