Super | Still worth it ?

Article by Roger Thomson

as featured in the Farm Weekly "Special Feature" issue 17 March 2022

Superannuation is an amazing tax concession. My tax specialization is super, so call me biased, however I believe super is as good as, if not even better, than some of the primary production tax concessions available to our farmers. Where else can you get a 100% tax deduction for a capital contribution to your investments?

From 2007 to 2017, you would have had to search high and low for an accountant in Australia not using super as a tax planning measure. High contribution limits allowed large amounts of money to flow into super and no limits on the upper value of pensions allowed some significant balances to grow in a largely tax-free structure. In the mid-2010’s for example there were 6 Self-Managed Super Fund’s (SMSF’s) worth more than $100m, some impressive investing there!

Due to the “too good to be true” status, super was always exposed to potential changes of the rulebook. 2017 saw the Turnbull Government introduce a limit on how much of your super could be held in the tax-free stage, set at $1.6m per member. This restrictive limit applies across all your super accounts, whether they are SMSF, retail, industry, or government funds and put into question the effectiveness of super, even with the limit indexing each year, now at $1.7m.

For our farmers, a common SMSF with Mum and Dad members, $3.5m is a familiar target for retirement. However, getting to this amount, you will need to be strategic and disciplined. It is akin to fencing on your farm. Do a little bit each year and it will pay off in the long run.

How does a SMSF fit in with succession planning?

With the record high values of farmland in many parts of WA, recent successful harvests, and high commodity prices, the future transition of family wealth is commonly skewed towards on-farm children at the expense of their off-farm siblings.

What used to be actively managed by good farm operators via off-farm investments like rental properties, shares, and dabbling in super is now almost impossible to equalize. Every effort in the short term should be made to boost these other areas to assist estate and succession planning wealth gaps over the longer term.

Super is an obvious solution to plug the wealth gap, and SMSF’s allow great flexibility in their investments including rental properties (if not used personally!!).

Use of the various contribution caps and generous Small Business CGT concessions can allow you to build your super rapidly. With the full benefit of the CGT concessions, planning from your advisor and active management of payment timing it is possible to get around $4.25m into a two member SMSF either side of 30 June. Special circumstances are needed for this, it shows the benefits are potentially available, although, you should rely on a longer-term conservative strategy, rather than this “rapid, testing the limits” approach.

SMSF | A good place to keep some farmland?

Transfer of farmland (or commercial property) can be a good way of placing a capital appreciating asset, and often with an increasing annual income stream, into the tax efficient investment structure of super.

If plans are to sell the farm business but retain the land for long term leasing, there may be a limited period to act before loss of any CGT concessions.

Alternatively, if farming is to continue you may opt to move some farmland using the general contribution caps and existing super balances.

This will trigger CGT implications on the sale of the land and potentially stamp duty as well, however this can be managed if using experienced accountants, lawyers, and/or advisors.

The benefits of holding farmland in your SMSF are:

  • Increasing assets for retirement and ongoing revenue stream
  • Protecting land from potential creditor claims
  • Tax benefits of lease deduction at farm level vs super tax rates, including a permanent reduction in primary production averaging
  • Security for the older generation for when transition occurs

The downsides are:

  • Property cannot be used as security for farm lending
  • Arms-length lease payment must be made annually regardless of cash circumstances
  • Issues with transferring large land titles

Of course, super is only one of many moving parts in your family and business structure. You need to make smart decisions at the business level to optimize your results and then make prudent use of the various investment options to limit unnecessary tax, provide for your future retirement, and plan the transition to the next generation.

To discuss this article further, we encourage you to contact Roger Thomson on (08) 6274 6400, 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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