Article by Brant Jansen
We are in the thick of our tax estimate and planning season with our clients and with record crops and profits for 2021 and 2022, tax for the 2022/23 financial year is a significant issue for many of our growers. For some, this is compounded by depreciation pool balances already being written off, temporary full expensing ending on 30 June 2023, and primary production averaging becoming less effective. The use of companies has risen over the last few years and will continue to do so, with a very attractive flat 25% company tax rate.
Instead of the farm business family trust distributing income to individuals, where the income is taxed at up to 47%, the income is distributed to a company (if eligible under the trust deed) where the 25% company tax rate usually applies and is hard to beat.
So far, this all sounds great – so what’s the catch? The catch is that the distribution creates a loan between the farm business family trust and the company. The company is owed money, and this must be dealt with, in line with the legislation, otherwise there are nasty tax consequences. Some options to deal with this include:
- Purchasing farm machinery, in the name of the company using available or borrowed funds from the farm business family trust.
- Purchasing farmland, in the name of the company using available or borrowed funds from the farm business family trust.
- Transfer of cash to the company. This is a very good option for clients with nil to minimal debt, as they can then invest funds within the company, but it can be harder to manage for those with larger borrowings.
- Set up a complying Division 7A loan agreement and make repayments over 7 years. These repayments may be in the form of recorded franked dividends which are taxable to the shareholders.
Note – always make sure the shareholder of your company is another family trust, so you have flexibility in whom the recorded franked dividends are allocated to, and flexibility in transferring control of the company to the next generation.
For clients with continually increasing tax profits, the above options become harder to manage over the medium to long term. For these clients trading through a company, or trading through a partnership between your family trust and company, could be a much better long-term option. Like anything, there are many pros and cons to these options!
So, contact your accountant or your local Byfields Business Adviser to have a healthy discussion on your structure and your long-term tax planning.
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.