When Malcolm Fraser uttered the line “life wasn’t meant to be easy”, he might well have been contemplating his tax return. While the significant appreciation in land values and generous tax write-offs for equipment in recent years have been favourable for equity levels and tax bills, there are some significant implications stemming from these bonuses that will soon affect many. Millions of dollars can be at risk without careful assessment and planning.

One of the key areas affected is the qualification for small business capital gains tax (CGT) concessions. These concessions provide for extremely generous reductions in the taxable values of capital gains on the sale of farm property for businesses that qualify. A recent example of well-planned transactions resulted in a farming family reducing a CGT bill from over $3 million to just $21,000. Eligibility is complex and differs from one business structure to the next.

There are various reasons why these concessions might be sought, including:

• Sale of the farming assets and wind up of the business,

• Intergenerational transfers and succession planning,

• Rearrangement of landholdings between family members (e.g. separating the business activities of two brothers),

• Granting of easements or other rights to renewable energy companies,

• Property sale and purchase to consolidate holdings in one location,

• Transfer of property to an SMSF for retirement planning, or

• Downsizing or de-risking.

When land ownership changes, even within a family group, it triggers a capital gains tax event. The default scenario involves taxing the difference between the market value of the property at the time of the change and its value at the time of acquisition. However, if the current vendor acquired the land before September 19, 1985, the gain is tax-exempt. For properties acquired after this date but more than twelve months before the sale or transfer date, most landholders can benefit from a 50% capital gain discount. (Note: Company landholders receive no discount, while SMSF landholders receive a 33.33% discount.) These concessions are highly advantageous but navigating and applying them can be complex. What's available to one farming business may not be available to their neighbours.

After any applicable discounts, the remaining taxable gain is added onto the landholder’s other taxable income for the year and taxed at their personal rate. For individual landholders, this rate can be as high as 47%, and often is.

The first critical hurdle is the initial eligibility test. Without passing this test, none of the concessions are available. The landholder must qualify as a small business entity (or be connected to a small business entity).

There are essentially two tests for this, the net asset test and the turnover test, and the landholder must pass at least one.

The net asset test

The net asset test is where the landholder and its related entities must have net assets of less than $6 million. Given recent land appreciation and substantial plant and machinery investments, it's easy to exceed the $6 million net asset threshold and therefore fail this test. The government has shown no inclination to raise this threshold, which has only increased once in the last 20 years. This leaves many landholders relying on the second test, where the turnover of the landholder (or its related business) must be less than $2 million.

The turnover test

For many, the $2 million turnover test is the easiest to meet. However, it may require timing land rearrangement or succession implementation with natural disasters and the resulting reduced income. Other strategies may exist to manage turnover below the threshold, including the use of specific sales tools.

The turnover test can be challenging to assess since turnover is defined as income according to ordinary concepts, which are not explicitly defined. One area that is unclear is the interplay of the recent instant asset write-off. Many farmers have taken advantage of the opportunity to lower their taxable income in the last three years using this write-off. As we return to more normal depreciation rules, several businesses will see the delayed impact of these generous concessions. Where an asset sale value exceeds the balance of the remaining written down value (now nil for many), the excess may be considered ordinary income of the business and counts towards the turnover test. If this causes your business to exceed the turnover threshold, it is critical that expert advice is sought, which may include an application to the ATO for a Private Binding Ruling.

Most sizable farming businesses must report income on an accrual basis, as outlined in ATO Public Ruling TR 98/1. This method means recognising grain sales as income when the grain is sold, not when payment is received. For pooled grain, income is reportable when distributions are declared, not when paid. Be cautious of grain buyers offering to delay payments for tax purposes, as these are generally ineffective in delaying income recognition.

For businesses reporting on a cash basis, grain sales are considered income when payments are received. Again, be careful of grain buyers offering to hold payments until a new financial year. Once you're entitled to receive funds and have given instructions to delay payment, you're considered to have earned the income as it's under your control.

Several other factors need to be considered, including look-back mechanisms if there is a one-off breach of the threshold. Transactions should be planned well in advance and a detailed assessment of eligibility made well before committing to a transaction. If the business is regularly exceeding the threshold, advance planning can identify future opportunities to trigger the desired changes or to delay transactions like machinery sales to fall under the threshold and qualify for the CGT concessions.

Other options to reduce turnover in critical years include planning to hold feed grain for fodder requirements for future drought, delaying some sales to hedge price movements, or using pooled products that declare and pay distributions later. It remains vitally important to consider the commercial risk and potential cost to the business of any sales decisions. Additionally, not every deferral or pooling product promoted by buyers will be effective in achieving the deferral they claim. Expert advice is critical, and the implication on your individual business needs to be carefully considered.

What you can do

Navigating the various parts of the Income Tax Assessment Acts can be exceptionally complex, but the rewards for getting it right are substantial. Investing in advance planning and careful consideration of how concessions interact with grain marketing strategies and business decisions can yield significant benefits.

Findex have a team of agribusiness specialists who work with you and your specific circumstance, handle the complex tax planning, and help get the most out of CGT. To find out more about our specialist team, and to find your local advisor go to findex.com.au

How Findex can help

As a top integrated advisory firm in Australasia, we offer uniquely tailored solutions that evolve with your needs. Our personalised, hands-on approach empowers clients to reach their financial, professional, and life goals. With 100+ offices across Australia and New Zealand, our vast geographical footprint grants you direct access to expert advisers, responsiveness to global and local matters, competitive local solutions, and community support.

Credit

Reproduced from “Australian Grain Review” digital magazine, Harvest Issue 2023.

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November 2023