Article by Scott Smith
One of the objectives of any good succession plan should be to transfer the land to the next generation, free from capital gains tax and transfer duty.
While many growers suspect that they automatically qualify for these concessions “given I have farmed the land for more than 15 years”, this is far from the truth.
The family farm duty exemption in WA is accessible in many cases, particularly with some forward planning. The bigger challenge in most cases is capital gains tax. Regardless of the amount being paid for the land, transfer duty and capital gains tax will apply as if the land is being transferred at full market value.
There is small business entity capital gains tax (SBE CGT) concessions available to reduce the capital gain, to nil in some circumstances, however, these are becoming more difficult to access.
15 to 20 years ago, 90% of our clients would have qualified for these concessions. However, the dramatic increase in land values in recent years, and an increase in farm income, has resulted in a large shift in eligibility for many growers. Now only 10% of our clients would qualify without significant planning.
The SBE CGT concessions are complex, and their application varies in each case, but the two gateway tests to qualify are the $2m turnover test, and the $6m net asset test.
Given many growers will not qualify on face value (and based on size some may never qualify), this highlights the importance of forward planning for a succession or retirement event, as there are still opportunities and strategies that can be put in place to access these SBE CGT concessions. Often these strategies require years of lead in time, therefore the sooner you start planning the more opportunities you will have.
The tax savings, if you can successfully access the SBE CGT concessions, are significant and can be hundreds of thousands of dollars, (and millions) in some cases.
For example, 1,000 acres:
- Purchased in 2004 for $350,000 ($350 an acre),
- Transferred in 2022 market value $3.5m ($3,500 an acre),
- Capital gains tax on the above could be over $700,000.
- The successful application of the SBE CGT concessions in connection with retirement could result in no capital gains tax. A huge difference!
In addition to succession and retirement planning, these concessions could also be used to allow a restructure of your landholdings. This could provide better asset protection, additional tax benefits, an uplift in the cost base to minimise future capital gains and to allow for easier succession planning down the track.
Please talk to your accountant or contact Byfields to discuss how you could qualify for these concessions.
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.