It is important to develop an effective tax structure in agribusiness and farming as the tax consequences can be substantial when transferring assets. Consideration needs to be given to stamp duty, income tax and Capital Gains Tax (“CGT”), to ensure the business has the best tax outcome in the day-to-day operations but to also ensure the best outcome when transferring assets down the track. In relation to the transfer of real property, an appropriately structured entity may save thousands on tax on both the acquisition and disposition of the land.
Stamp duty (transfer duty) is payable by a purchaser or transferee upon the transfer of a property.
What if no consideration is paid?
Where no consideration is paid, transfer duty shall be payable on the market value of the asset. There are several stamp duty exemptions/ concession available for the transfer of land provided certain conditions are satisfied.
Section 24 of the Duties Act 2000 (Vic) permits the disaggregation of certain dutiable transactions when acquiring property consisting of multiple titles and farming goods/machinery. This can substantially reduce the rate of stamp duty payable upon transferring the property because stamp duty will be assessed on the individual values of each title and the total value of the goods/machinery component.
Conversely to disaggregation Section 24 also allows for aggregation of titles where multiple separate transfers form substantially one arrangement. In this instance the transfers can be aggregated and stamp duty assessed on the total dutiable value of the property. In some instances this can reduce your liability for stamp duty.
It is therefore imperative that you obtain legal advice before purchasing properties consisting of multiple titles to ensure that any opportunity for a reduction in stamp duty is obtained.
Capital Gains Tax
Capital Gains Tax (“CGT”) applies to any capital assets sold or transferred after September 1985. With careful planning, a family farm may be able to access the concessions available for CGT.
Small Business Concessions
There are four (4) small business concessions available to a taxpayer for CGT. These include the 50% active assets exemption, the fifteen (15) year asset exemption, the retirement exemption, and the business asset rollover concessions. To qualify for any of the small business concessions an entity must first satisfy all ‘basic’ conditions that are common to all concessions. The below concessions then set out further requirements that must be satisfied for each specific concession to apply.
1. The 50% active assets exemption
The 50% active assets exemption allows individuals and trusts to discount a capital gain by 50% if the asset has been held for more than twelve (12) months. Superannuation funds can access a 33.3% discount on a capital gain if the asset has been held for more than twelve (12) months however there is no discount available for companies.
2. The fifteen (15) year asset exemption
The 15 year asset exemption allows a taxpayer to be exempt from paying CGT on an asset they have owned for more than 15 years provided certain conditions are met. The asset must have been held by the taxpayer for a continuous period of 15 years up to the date of the sale and must have been an active asset for at least 7.5 years of the whole period of ownership.
If the taxpayer is an individual, at the time of the CGT event they must be at least 55 years of age or permanently incapacitated and the CGT event must be in connection with their retirement. Retirement is considered to also include a significant reduction in hours worked or a change in the nature of present activities.
If the taxpayer is a company or trust, the entity must have a significant individual throughout the period of ownership and the significant individual must be at least 55 years or permanently incapacitated at the time of the CGT event. A significant individual is one who has a participation percentage of at least 20% in the company or trust.
For a family farm that has been transferred through generations, it is important to ensure the land has been held by the owner claiming the exemption for 15 years and not held by the wider family group.
Consideration also needs to be given to circumstances such as death, discretionary trusts with tax losses or no net income, retirement, permanent incapacity, involuntary disposals and separate interests in the same CGT asset.
3. The retirement exemption
The retirement exemption allows a CGT event to be exempt from tax if the proceeds are used in connection with retirement. The limit available to an individual is $500,000.00 for this exemption.
If an individual wants to use this exemption and is under the age of 55 at the time of the CGT event, they can make a contribution to the amount of the capital gain on the disposal of the asset to a superannuation fund and therefore will not be required to pay CGT.
In an individual wishes to use this exemption and is 55 years of age or above they are not required to make a contribution to their superannuation fund. However the Australian Taxation Office must be notified in the tax return that the retirement exemption has been applied.
If the CGT asset is owned by a company or trust, to be eligible for the retirement exemption they must meet the conditions of a small business entity and the significant individual test. Further conditions may also be applicable therefore care must be taken.
4. The business asset rollover concessions
The business asset rollover concession allows a taxpayer which qualifies as a small business to defer any capital gain from a CGT event if the tax payer is acquiring a replacement asset. On the subsequent sale of the replacement asset, the cost base of the replacement asset is reduced by the rollover amount and tax is payable on any capital gain at the time of the CGT event of the replacement asset. To receive this concession the taxpayer selling and purchasing the asset must be the same entity (same name).
Many succession plans for farming land and agribusiness are for the transfer of the farming land through generations. CGT will apply to transfers of farming land through the family unless there is a concession available.
Small business restructure rollover
There is a small business restructure rollover which has a different eligibility criteria to the small business concessions. The small business restructure rollover allows small businesses to transfer active assets from one entity to one or more entities on or after 1 July 2016 without incurring an income tax liability. The concession can be accessed if the entity has an aggregated turnover of less than $10 million and the rollover applies to the transfer of an active asset is a CGT asset, trading stock, revenue assets or depreciating assets.
What is a plan of subdivision?
A plan of subdivision permits an owner of a parcel of land to divide the land into two or more new parcels of land.
New parcels of land that can be created by a plan of subdivision are lots, roads, reserves or common property.
A plan of subdivision may create restrictions, owners corporations or any easements (including implied easements) necessary to make the development of land functional.
Any new plan of subdivision is lodged and approved by Land Use Victoria in accordance with section 22 of the Subdivision Act 1988 (Vic).
A plan of subdivision may also remove or vary restrictions and easements encumbering a parcel of land (as created in an earlier plan of subdivision), with a planning permit under Section 23 of the Subdivision Act 1988 (Vic).