Earlier this year, we launched the Part One of our series on Succession Planning.

This issue, we shall explore the options you have if you would like to transfer your farming business all at once (as opposed to over time).
 
If you are at the stage of wanting to retire from farming, your preferred strategy may be to enter into an ‘arms length’ contract of sale with your children who want to continue to run the farm once you retire.
 
In this situation, you would negotiate the terms of the contract with the ‘Buyer’ (your children) similar to how you would for a normal farm sale.
 
It is particularly important in a related party transfer to consider the following:
  • 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 after settlement;
  • 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!

When devising your succession plan, you should ensure that you are fully aware and informed of all taxation consequences before making a choice on which way you want to go. You should seek advices from your accountant and financial planner when considering which succession plan is right for you.

Remember the QRIDA Grant!

Noting our above comment to seek advice - the QRIDA grant is still available for those wanting to speak to a solicitor, accountant, and/or financial planner about their succession plans. See our earlier publication on this topic.

Next issue, we’ll continue our discussion on succession planning.

The content of this column is to provide a general guide on this topic. Professional advice should be sought about your specific circumstances.
 
For more information please contact our rural team.