RSM Australia

Maximising superannuation when selling the farm

In my experience a lot of farm owners, when asked what they think of superannuation, will remark ‘my farm is my super fund’.  However what happens when the farm is sold?

If the farm is sold to a purchaser outside of the family there will likely be a substantial lump that vendor may need advice on.  If the intent is to retire and you are over the age of 55 and certain criteria is met, you may be able to take any tax gain on the sale of the farm as cash and not pay any capital gains tax (CGT).  Your accountant will provide you with this advice.

The choice then is where to place the capital from the sale of the farm.  What ownership structure may provide the best benefit? Superannuation is often the choice at this stage with no tax payable on income or gains from the age of 55* on monies invested in this tax structure.  Also, with careful planning, you can make sure you can maximise the amount of money that can be held in this tax free environment.

There are certain tests and criteria a farm owner must meet which will enable a gain from the sale of a business asset to be CGT free. Once this has been determined how can we maximise a tax free contribution to super?

Under normal planning, an individual will be able to add a tax free contribution of $180,000 in any one financial year to a complying super fund.  If the individual is under the age of 65, they will also be able to take advantage of the ‘bring forward rule’ meaning three years of contributions can be brought into one financial year and placed into a complying super fund.  This means under current rules $540,000 can be added to super. However clients may ask?

  • I have more funds from the sale of my farm business. Can I contribute more to superannuation?
  • I am over the age of 65. I can only contribute $180,000?

Farm and business owners have a lifetime CGT cap of $1,355,000.  What is often little known is that when using this cap, the funds do not have to be eligible capital gains from the sale of a business.  Monies contributed can be sale proceeds from a business whether there is CGT associated with the sale or not (including pre CGT farm land).  Usually any asset sold that is inherently connected with the running of the business will qualify. 

Example

John (68) and Jane (67) own 1500 acres of farm land.  They have held the land as joint tenants.  They have farmed the land in partnership.  They are winding up the business as they are retiring.  They have sold the land to their neighbours for $1,600 an acre and have grossed $2,400,000.  They have also had a farm clearing sale and have grossed $700,000.  With pay out of debts of $1,000,000 and other costs of $200,000 they now have $1,900,000 with which to fund their retirement.  They have seen their accountant and the accountant has confirmed:

  • farm assets sold were considered an ‘active asset’ for CGT purposes
  • John and Jane meet the ’15 year rule’, meaning they have owned the assets continuously for at least a 15 year period
  • John and Jane are permanently retiring from their farming business
  • they are over the age of 55

In conjunction with the accountant’s advice, John and Janes financial planner suggests they do not claim any other CGT small business concessions.  The planner says by electing to contribute to superannuation using the lifetime CGT cap of $1,355 million the following can be achieved:

  • John and Jane can contribute their total sale proceeds of $1,900,000 to superannuation
  • the $1,900,000 is tax free contribution
  • even though they are over the age of 65, they can still both make use of their lifetime CGT cap and contribute larger amounts into superannuation they normally would have been able to do
  • all future income or gains from the investments made in their super funds will be tax free
  • John and Jane still have full access to their funds via a tax free pension or lump sum

With high level planning, this strategy has enabled John and Jane to move into the next stage of their lives with the first building block completed of a successful retirement plan.

In this case the farmers are extremely happy to still be able to say that their ‘farm still is their super fund’.

* Current rules are that anyone born before 1960 can commence a tax free pension from the age of 55.  For people born after this date there are transition rules in place with anyone born after the 1st of July 1964 having a preservation age of 60.

This presentation article has been prepared by RSM Australia Financial Services Pty Ltd ABN 22 009 176 354, AFS Licence 238282. This article does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.