Article by Neil Hooper
I was talking recently with a group of broadacre agriculture specialists, including an ag consultant and a lawyer, and we got onto the topic of farm succession.
The discussion was along the lines of how much harder succession planning is now, compared to say five years ago, and why is this the case.
We came up with the following reasons:
Firstly, the huge increase in land values has had a massive impact. The combination of increased values, farm expansion and some excellent yearly profits has seen a typical $10m farming operation 5-10 years ago, become a $25m farming operation today.
If the off-farm assets have not also increased in value over that period (and in most cases they haven't risen anywhere near the same extent), then the off-farm assets may be worth say, $2m. While $2m is nothing to be sneezed at, it's the disparity between the farm and off-farm assets that is the issue.
What is a reasonable expectation from the on-farm sibling in relation to taking over the $25m operation if he or she has put in 10 or 15 years of hard work into the farm?
What is a reasonable expectation from the off-farm siblings in relation to what they might one day inherit?
Talking to my lawyer friend, there has been a noticeable uptick in enquiries in relation to these questions over the last year or two.
The second reason we came up with, is that the majority of land held is now post capital gains tax (CGT) as it has been purchased or transferred to the current owner after September 1985. This means that the next transfer is likely to incur a significant capital gains tax cost.
To put this in context, land purchased in the early 1990’s for $200 per acre could now be worth north of $4,000 per acre! To illustrate the point, let’s assume a 5000-acre farm bought in 1990 for $200 per acre is now worth $4,200 per acre. Even after the 50% CGT discount, there is still capital gains tax on $2,000 per acre. At the top marginal tax rate of 47%, that's $4.7m of CGT payable!
Now some of you will tell me that there are CGT concessions available, but to access these, as a starting point, business turnover must be less than $2m, or net assets must be less than $6m.
Twenty years ago, the majority of my clients would have passed one of these tests, but now few would be eligible.
The combination of the above is that it has never been more critical that you seek specialist advice from experienced professionals in this field to get the best outcome.
You generally only get one crack at getting succession planning right, so commit the time and resources to give yourself the best chance of a successful result.
If you would like to discuss further, please contact your Byfields accountant.