In my previous article, I discussed transferring the family farm to a child without paying stamp duty. The next important step is to seek professional advice as to the capital gains tax implications if the farm was transferred. In many cases, capital gains tax is not a major issue with the right advice.
As farming families consider the transfer of ownership and/or management, there is one overriding desire and that is certainty. Certainty for the younger generation can include a viable farming future, ownership or control, and reliance on their parents to have their affairs in order when they retire or die. Certainty for the parents often includes sufficient income in retirement, an adequate residence, harmony in the family and the maintenance of a viable farm.
Transferring a viable farm is a vital ingredient in any farm succession plan. The parents will often have to assess what is a reasonable portion of their wealth that should pass to non-farming children without risking the viability of the farm. Invariably it will mean favouring the farming child at the expense of non-farming children.
Many parents are reluctant to transfer assets to their children due to the following potential risks:
- a relationship breakdown may result in the farm being sold.
- with the major assets of the parents being gifted to the farming child, how do the parents ensure the non-farming children are treated fairly?
- how can their farm residence and tenancy be secured? Similarly, if a parent has to move to residential aged care, where will the money required come from?
- what if the farming child decides to sell the farm in the short or medium term?
- what if the farming child dies or is permanently disabled in the short or medium term?
Fortunately, there are many potential solutions for farming families to allay these concerns and reduce these risks. One solution could be instead of gifting the full value of the farm at the time of transfer, consider only gifting part of the value of the property. This residual debt may be set aside for retirement benefits or aged care or for the benefit of non-farming children.
Alternatively, the transfer could be subject to various conditions. For example, in the event of death, divorce or disposal by the farming child, certain sums of money are payable to the parents and/or siblings. The amount payable could diminish as more years passed from the date of transfer.
On a similar theme, the parents may decide to transfer the farm on the basis that they will lease the farm back for say a period of 10 years with the total lease amount paid immediately. This would mean maintaining the control of the asset without having ownership for a set period of time.
Another strategy that is often used to enable the parents to continue living on the farm is for the parents to retain the right to reside in the farmhouse for as long as they wish on rent-free basis.
However, be very careful, granting the parents the same right would create a significant capital gains tax liability for the younger generation.
Clearly, each farming family will have their own unique circumstances. Rest assured when designing a farm succession plan, no one size fits all.
This is not advice. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur rapidly. We, therefore, recommend that our formal advice is sought before acting.