The Continued Rise of Companies Revisited

Article by Brant Jansen 

Last year I wrote an article about the continued rise of companies, and as we approach 30 June, I encourage you to consider the use of companies in your structure as part of your longer-term planning. 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. This tax rate is very hard to beat! It sounds great!  

But 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 legislation, otherwise there are nasty tax consequences. Some options to deal with this include: 

  1. Purchasing farm machinery, or farmland, in the name of the company using available or borrowed funds from the farm business family trust. 
  2. 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. 
  3. 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. 

Sometimes the above options can successfully manage the distributions, but for clients with continually increasing tax profits, a longer-term strategy to consider is trading through a company. The flat 25% company tax rate applies to all profits, and wages/dividends can be paid to family members to cover off on their drawings. There are some downsides to this: 

  1. Loss of primary production averaging. 
  2. Inability to obtain the transfer duty exemption on farmland transfers. 
  3. Inability to use FMD’s. 

In other cases, a hybrid structure may suit better by trading through partnership between a trust and a company, but this is another topic on its own! If you are using a company, make sure you get the shareholding right. Best practice to have a separate trust owning the shares, which allows you flexibility when paying dividends, and flexibility with succession when transferring the company to the next generation. As opposed to individual shareholders where dividends must be paid in proportion to the shareholding, and capital gains tax issues arise when the shares are transferred to the next generation. 

I recommend you review your structure, and if you don’t already have a company involved in your structure, contact your accountant or your local Byfields Business Adviser to have a healthy discussion on your structure and whether this will benefit your longer-term planning.  

To discuss further please contact your Byfields accountant. 

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