In recent times the ATO has had companies under the microscope in terms of taxation affairs.
However, they can still be a useful tool for primary producers if used wisely and careful consideration is given to the shareholders of the company in a variety of instances. A company structure can aid a farming business in the following ways:
Tax minimisation and wealth creation
Companies are useful to help minimise taxation via trusts distributing profit to them.
The Australian Taxation Office (ATO) has recently changed their interpretation of the law governing these arrangements, making them harder to comply with, however, to counteract this, trust distributions can be paid in cash to satisfy the ATO, which creates further opportunities beyond tax savings.
If you plan to save money the traditional way, by paying tax at personal tax rates and saving the balance, more cash will be lost in taxation liabilities. The tax saving by utilising a company, in many instances as much as 15% per annum, can be put towards family goals of business growth, succession, and an earlier retirement.
If there is a commitment to regular cash payments of trust distributions to a company, you will see wealth build year on year at a greater rate than if you tried to save in your personal names due to the significant tax savings.
Succession planning & transferring assets during your lifetime
Succession and/or early retirement can be made simpler with another source of money/investments available for the retiring generation to draw from and to, potentially, leave to off-farm children.
If set up correctly this company could also be transferred tax free to your children as an early inheritance or off-farm payout.
A company can also be treated as another form of superannuation. This provides a more tax effective income stream to individuals during retirement. This is where the ownership of the company is important, it is essential that the shares in the company are owned by a Trust to facilitate future flexibility of the ownership.
Structuring future farmland purchases
The cost of land has increased significantly in recent years with high demand in many regional areas.
This means greater debt is required to achieve the purchase of additional land. To achieve an aggressive debt reduction plan consideration should be given to how a company might own the land to access a lower tax rate. Again, the company structure needs careful consideration. By a Trust owning the shares in the company this can enable inter-generational passing of the ownership of the company and control of the land owned by the company.
Whilst there is much to navigate with company structures, they can still be an important tool in wealth creation.
For more information
For more information on company structures and how you can benefit, please contact your local RSM adviser today.