Business and Landholding Structuring
In an increasingly competitive and rapidly changing industry, farmers and agribusinesses are required to become more flexible and seek resources and strategies for success. Critical to the success, is the formalisation of relationships, the structures of which can offer opportunities to share equity and ensure that all parties have transparency to contribute towards a common goal.
Company establishment/incorporation
What is a company and what are its benefits?
A company is its own separate legal entity and therefore provides protection for your personal interests and assets (this is known as limited liability). In addition to limited liability, a company also has tax benefits, with income earned through a company attracting a company tax rate which is usually lower than that paid by individuals.
These benefits must be weighed against the additional legal obligations that company officers (directors and other persons in positions of responsibility) must legislatively comply with.
Establishing a company also provides continuity for businesses, allowing them to survive throughout any changes to the make-up of its directors or shareholders. Whether the company operates as a business or it is the trustee of a trust, the assets, contracts, entitlements and obligations remain with the company.
A company can therefore be a very useful structure for ensuring the continuation of your business, whilst protecting your personal assets.
What is the process?
Once you decide on a company structure, Coulter Legal can assist you throughout its establishment and any future changes that are required, including share transfers, change of directors and adopting a new constitution.
You should seek independent financial advice before choosing to establish a company. Once you decide to establish a company and have chosen its name, other important details such as who will be the director(s) and shareholder(s) shall have to be made.
How can Coulter Legal help?
Coulter Legal’s experienced Corporate Services team can register your company and issue you or your financial advisor the relevant documents within one business day.
Partnership agreements
What is a Partnership?
A partnership is a business relationship between two or more individuals or corporations. Unlike companies, partnerships are not separate legal entities but they are entitled to an Australian business number if operating in Australia and must have a tax file number and submit a tax return.
Unlike joint ventures, partnerships are designed to be ongoing relationships so it is important that the terms are documented in writing. This written document is known as the partnership agreement.
There are typically two types of partnerships:
1. General partnership.
A general partnership is one where all partners are equally responsible for the business and have unlimited liability for the debts and obligations that it may incur. Family partnerships often fall within this category are where two or more members are related to each other.
2. Limited partnership.
A limited partnership is one where the partners can limit their debts and obligations to the business. This arrangement consists of at least one general partner (as described above, having unlimited liability) and one or more limited partners. The partnership agreement can be tailored to the needs of the limited partnership. As there is no maximum number of limited partners, many circumstances and arrangements can be catered for.
What is a Partnership Agreement?
A partnership agreement is an essential part of the business relationship as it should cover every possibility that might affect the partnership.
What needs to be considered in a Partnership Agreement?
There are many issues to consider, including but not limited to: –
1. what happens when a partner dies or wishes to be removed;
2. the description of management powers and duties;
3. the term of the partnership and how a partner can buy their share of the partnership.
Accordingly, having a written agreement that deals with issues such as the above provides clarity for the partnership and can help resolve future disputes.
Why should you seek legal advice before going into a partnership?
Each partnership is unique, so there is no one-size-fits-all agreement. It is important for the viability of the partnership that you seek legal advice when preparing a partnership agreement.
How can Coulter Legal assist?
The team at Coulter Legal shall help determine the best agreement to suit your purpose and shall highlight common issues in partnership agreements or draft a partnership agreement on your behalf. This will help protect your partnership at inception, clarify the roles of the partnership and protect your business going forward.
Shareholder agreements
What is a Shareholders Agreement?
A shareholder agreement governs the relationship between a company, its directors and shareholders. The agreement usually determines how the parties interact during the term of the relationship but also what happens when it ends. These agreements can be very complex and are different for each and every situation so it is important to get the right advice from the outset.
Although not mandatory, a shareholder agreement is an important document for managing the relationship between shareholders and a company. It operates in addition to the company’s constitution and provides the flexibility to deal with issues that the constitution does not address.
Shareholder agreements can therefore be an important tool in ensuring the effective management of a company, its directors and its shareholders.
What issues are covered in a Shareholder Agreement?
The shareholder agreement is designed to ensure that the shareholders are treated equally and have their rights protected. The relationship between the shareholders and the company is also clarified and may cover issues such as the management of the company, business operations and the appointment of directors. Shareholders’ individual rights that are typically dealt with under a shareholder agreement can include issues such as dividend distribution, sale and transfer of shares and terminating events.
The breadth of issues that can be addressed in a shareholder agreement is a double edged sword, providing both the flexibility to cover a variety of circumstances but also creating a complex area of law. It is therefore essential that you seek legal advice in preparing a shareholders agreement that is tailored to your specific circumstances and properly protects both the shareholders and their relationship with the company.
How can Coulter Legal help?
The experienced team at Coulter Legal can provide advice on what rights should be covered, ensuring that individual shareholders are protected while also preserving the relationship with the company. Coulter Legal can draft a shareholders agreement that will provide clarity to both the company and its shareholders or negotiate one on your behalf.
Joint venture agreements
What are Joint Ventures?
Joint ventures are arrangements between two or more entities, combining their strengths and working together towards a specific common goal. A joint venture is usually created for once particular goal and are designed to last for a specific period, this differentiates them from a partnership which is normally an ongoing business relationship. Due to the different nature of the parties and the unique goals of each joint venture there are no standard agreements. This means that being across the issues and potential risks is essential when drafting your joint venture agreement.
Structure
Joint ventures can be structured as either:
1. Unincorporated: where a joint venture agreement outlines the terms and governs the relationship between the parties; or
2. Incorporated: where a separate company is incorporated and the parties to the joint venture become shareholders in the company.
Joint venture agreements need to address a variety of issues, including:-
1. decision making;
2. the contributions of the parties;
3. what happens to any intellectual property produced;
4. the sharing of profits and risk; and
5. what happens upon the termination of the agreement.
Why should I invest in a Joint Venture agreement?
Clarifying the parties’ obligations under the joint venture is an important step in ensuring the venture’s viability and success. Although it would be technically possible to form a joint venture without a written document, having the terms of the agreement in writing provides clarity should any issues occur.
There are numerous cases where an amicable and friendly arrangement is soured during its lifetime and dissolves. Having the terms in writing provides the parties with security and a path forward should any disputes occur or if they wish to terminate the arrangement.
How can Coulter Legal help?
It is important that you seek professional legal advice when drafting a joint venture agreement, not only to help protect your personal interests but to help protect the joint venture itself.
Business succession agreements
What happens if a shareholder or equity partner dies, is critically injured or is permanently disabled? Changes to the shareholding or equity structure of a small or medium sized business can seriously hamper its viability.
What is a business succession agreement?
Business succession agreements (also known as buy-sell agreements) are put in place to deal with the involuntary exit of a shareholder or principal. A correctly drafted agreement can help your business transition smoothly. This is achieved by providing for the remaining parties to acquire the interest of the party leaving the arrangement, which clarifies the process around who the interest passes to in the event of an involuntary exit.
Having a business succession agreement in place clarifies issues such as hereditary succession, continuity of management, market value of shares and equity to estates.
When should a business succession agreement take effect?
There are a number of events that can take place which may trigger a business succession agreement to take effect. This will ultimately depend on the business arrangement the agreement is drafted for but may include events such as:
- upon the death of a shareholder or partner;
- upon the retirement of a shareholder or partner;
- upon termination of employment;
- upon an attempt to sell the equity or shares; and
- upon bankruptcy of the shareholder or partner.
In some cases when buying out the equity or shares the purchaser may not have the necessary funds available. Additional funding will need to be sought, for example from borrowing from another party or by acquiring insurance. In these circumstances the business succession agreement should contain funding mechanisms which allow for the preferred alternative funding.
What are the advantages of a business succession agreement?
In addition to the stability and clarity mentioned above, business succession agreements carry a range of advantages to both the business and the shareholder or partner concerned. For the business, a business succession agreement can prevent the equity passing to heirs who do not have the required experience to run the business, it can reduce the conflict between the remaining partners and can put in place an agreed mechanism for valuing the equity or shares of the business.
There are also personal benefits of having a business succession agreement in place for the shareholders or partners. These can include ensuring that there is adequate funding for the estate or departed partner or shareholder or providing for the equity in a family business to pass to the next of kin. There may also be important tax implications in place in some insurance circumstances.
How can Coulter Legal assist?
Coulter Legal can assist in preparing your business for unexpected events so that it is in the best possible position. Contact a member of the team to get your business succession agreement in place or to assist in further succession planning matters.
Superannuation Funds
A self-managed superannuation fund (“SMSF”) has become an increasingly popular vehicle for investment into property, including agricultural property.
In the case of farmland, similar to a commercial premises, the SMSF ordinarily purchases the agricultural property and then leases it to a party to operate primary productions activities. This can be a third party, or a related party.
What are the benefits of purchasing in property in a SMSF?
There are many benefits of purchasing property in a SMSF, including:
- providing for your future retirement;
- taking advantage of tax concessions available to SMSFs;
- segregating land ownership and your business operations to be operated by two different entities, which provides for some asset protection; and
- unless you direct it to your legal personal representative, your superannuation is not dealt with under your Will after your death.
As such, if you have concerns that your Will may be challenged by a family member, a valid Binding Death Benefit Nomination can ensure than assets go directly to a nominated beneficiary, rather than through your Will where they risk being caught up in a Part IV challenge.
What should I be thinking about when purchasing a property in a SMSF?
The rules which govern SMSFs are very strict, and a breach of legislation including the Superannuation Industry (Supervision) Act 1993 (Cth) can lead to significant penalties. For this reason it is important that you work closely with your legal and financial advisors to ensure than any purchase of agricultural land and its use meet any requirements under SMSF legislation.
This is especially important if you are thinking of transferring farmland owned by you into your SMSF, or are looking to lease farmland held in your SMSF to a related party (for example your business) after purchase.
In these circumstances amongst other things you must ensure that:
1. the transfer or lease is on “arms length commercial terms”, that is, for market value; and
2. the property can be characterised as “business real property” at the time of the transaction, namely it must be used wholly and exclusively for business.
You should also look to see if an investment in agricultural property is consistent with your SMSF’s investment strategy. If not, you shall need to consider updating the strategy, in consultation with your financial planner, prior to the purchase.
What if I need a loan to complete the purchase of a property into my SMSF?
If you do not have enough cash in your SMSF to purchase a property and provided your SMSF trust deed permits it, you can take advantage of a limited recourse borrowing arrangement.
A limited recourse borrowing arrangement involves the SMSF taking out a loan from a third party lender, which is used to purchase an asset or assets, which are held in a separate trust by a ‘custodian’ for the benefit of the SMSF. In the event of a default on the loan, this arrangement protects the remainder of the assets of the SMSF because the lender only has recourse against those assets held in the trust, by the custodian.
If you enter into a limited recourse borrowing arrangement, your lawyer shall prepare a Custodian Agreement and/or a Bare Trust Deed, which sets out the conditions upon which the asset is held.
How can Coulter Legal assist me?
Coulter Legal’s team of lawyers can work with you and your financial advisor to assist you to prepare the relevant documentation required to complete the purchase or transfer and put any borrowing arrangements or leases in place. Further, we can advise you on SMSF legislation obligations and stamp duty and land tax liabilities.
Trusts
A trust is a popular structure for people who are looking to purchase property, including farmland, but may be seeking a form of asset or personal protection. Alternatively, you may be looking to provide for long term family or business succession planning options.
What are the benefits of purchasing property into a trust?
There are numerous benefits to purchasing a property into a trust structure:
1. Asset protection, in the case of separation, insolvency or bankruptcy, the assets of a trust can be protected as they are not the assets of the person.
Segregating land ownership and business operations to be operated by two separate entities can provide for further asset protection;
2. Long term family or business succession planning.
This can be particularly important for multigenerational farmers who seek farming operations to be continued by their children after their retirement or death. Trust structures can prevent the need for complex and confusing transfers, which may result in stamp duty and CGT liabilities arising; and
3. Unlike a company, upon sale of the property, a discretionary trust can take advantage of the 50% CGT discount, for properties held for more than 12 months; and
4. In the case of a discretionary trust, the trustee has the discretion as to where the income and capital of the trust is distributed. This permits income to be directed towards specific persons in the family, when required.
What trust structures are available to me?
There are two main trust structures which our clients utilise to purchase property:
1. Unit trusts
In a unit trust, the beneficiaries have a fixed entitlement to income and capital and a proprietary interest in the trust assets, based on the percentage of units they hold in the trust. Unitholders also have rights to vote at any meeting of the unit trust. The unitholders together control the unit trust, and (subject to the terms of the deed) they have the ability to appoint or remove a trustee.
Unit trusts can be utilised by families, but are most often utilised by non-related parties who are seeking to hold a property or jointly operate a business together.
Often unitholders of a unit trust shall also execute a unitholder agreement, which sets out the matters which are not governed by the trust deed.
It should be noted that if you are intending to purchase a property in a unit trust, there are specific requirements that must be met in order to receive Stamp Duty concessions available under the Duties Act 2000 for farming land.
2. Discretionary trust
In a discretionary trust, also known as a family trust, the trustee holds the property for the benefit of the beneficiaries as set out in the trust deed. Unlike a unit trust, the beneficiaries have no interest in the trust assets and no power to require the trustee to pay them capital or income. The beneficiaries cannot appoint or remove trustee, that power is generally reserved to the appointor or guardian of the discretionary trust.
The trustee has total discretion as to when and to whom distributions of capital and income are made. This can allow a trustee to take account of an individual’s annual tax specific circumstances.
Discretionary trusts often have a wide class of beneficiaries, including parents, children, grandchildren, siblings, spouses and trusts and companies of which beneficiaries have an interest.
Before purchasing a farming property, it is imperative that the class of beneficiaries does not exclude any beneficiaries from future Stamp Duty exemptions or concessions, for example the Young Farmers Exemption. Click here to learn more.
Shall the entity I choose to purchase a property effect my Stamp Duty or Land Tax?
If the eligible requirements are met with the State Revenue Office, the property that you are intending to purchase may be eligible for concessions in stamp duty at the date that a later transfer occurs For example, to a beneficiary of the trust. For this reason it is important that you seek legal advice prior to signing the Contract of Sale to ensure that the entity meets the evidentiary requirements. Failing which you may well be liable for full stamp duty.
How can Coulter Legal help me?
Coulter Legal’s team of lawyers has extensive experience in advising and assisting clients in relation to the establishment of trusts and purchase and transfers of property into trust structures.
Working with you and your financial advisor we can advise you if a trust structure is the most appropriate option for you on the basis of your individual circumstances and what that trust structure is best suited to your needs. Where required we can assist you to establish the trust, and provide advice on stamp duty and land tax liabilities.
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