Succession Planning for Farmers: Part Two - The ‘Arms Length’ Family Transfer
Earlier this year, we launched the Part One of our series on Succession Planning.
- The Purchase Price -There are many options you can consider when trying to decide on a purchase price for the farming business. See
below for further explanation on your options;
- The Settlement Date – When will you hand over the business to the Buyer? If you are operating a cane farm, you may prefer to do this
during the slack. This way you can keep the Mill Pays for the last year’s crop you harvested and the Buyer can pay for the harvesting costs and
obtain the benefit of the Mill Pays for the next year’s crop;
- Inclusions – What are you transferring over to the Buyer? Such inclusions in addition to the freehold land could include Plant and
Equipment, Irrigation Equipment, Water Licences and/or Water Allocations, Road Licences, and if you own a cane farm, Mackay Sugar Shares and Sugar
Terminal Limited Shares, etc; and
- Any special requests? One of the most common requests we receive when preparing a contract between related parties to transfer a farming
business is for the Buyer to allow the Seller to continue to live in the farm house after settlement. If you stay living at the farm, you’ll need
to consider protecting your rights legally. We will discuss ways that you can do this in a later issue.
The Purchase Price
There are a number of options available to your family in order to pay the ‘Purchase Price’ under the contract. A few common examples are noted below:
- You can gift the farm land and business free of debt - this may be an option if you have repaid any debt over the farm. This option is common where
your children have made large contributions to the farm previously and invested a substantial amount of time and effort in the property. You should
only consider this option if you have sufficient retirement funds and do not need to rely on the sale of the farm or the farms generated income
to live comfortably in retirement;
- If there is an existing debt owed over the farm, you may agree with the Buyer to ‘transfer’ this debt to the Buyer in exchange for the farming business
assets. In the event of a transfer of debt, you would need to discuss with your bank to ensure that you can be released from any future liability
owed to the financier from the settlement date. Again, this option should only be considered if you have sufficient retirement funds to live off
- You may negotiate with the Buyer to pay any debt owed over the farming business plus add an extra amount of cash so that you can use this to live on
in retirement. The purchase price in this instance does not need to be the market value of the property; and
- Where finance may be difficult to obtain by the Buyer or you just want to keep the banks away, the purchase price may be paid by instalments or under
a loan agreement with you after the transfer has been completed. This is also known as “vendor finance” which will be covered in more detail in
the next issue.
Remember the Transfer Duty Concession!
Any transfer of real estate or business assets carries with it an obligation to pay Transfer Duty (ie. a tax) to the Queensland Government. However, when
transferring a primary production business between related parties, whether it be by way of gift or you receive money from the Buyer, provided that
you are a ‘defined relative’ and the Buyer intends to carry on the business, the Buyer should be eligible for the Transfer Duty Concession for Primary
Producers which could reduce their duty liability to Nil.
Remember to seek advice!
Remember the QRIDA Grant!
Next issue, we’ll continue our discussion on succession planning.