Self managed super for agribusiness
Self-managed superannuation can help you build personal wealth away from the farm. But you need to be aware of the rules.
When done correctly, agribusinesses can maximise returns on investment through self-managed superannuation. NAB’s Head of Financial Planning, Iain Rogers, outlines areas that need to be considered in the process.
Property versus business
First, explains Rogers, there’s a distinction between real estate and a business when it comes to Self Managed Superannuation. “A Self Managed Superannuation Fund (SMSF) can own a farming property but it cannot operate a farming business,” he says. “Typically, an SMSF that owns a farm will lease the farm to a related party, such as fund members, family or a trust or company controlled by fund members and their family.” Such a lease must be on arm’s length terms.
Tax shelter of assets
Superannuation funds, including SMSFs, are taxed on a concessional basis, with a maximum tax rate of 15 percent. The low tax rate can allow part of the income – received by the fund as rent from the farm – to be sheltered from higher tax rates that can apply to individuals and companies.Rogersadds that off-farm investments can also generally be held by an SMSF and income and capital gains from those assets can enjoy the same tax shelter.
But do read the fine print. An SMSF can’t be used in all circumstances. There are strict rules about both accessing superannuation benefits and acquiring assets from, or leasing them to, fund members and associates.
Tax-effective retirement income
“Where farm land is owned by the farmer or an associate, the return from the ownership of the land is usually received in the form of business profits or as rent payable to a company or trust,” saysRogers. “Generally, that income or return is then taxed at either individual or company rates.”
An SMSF paying a pension doesn’t pay tax on income that’s funding the pension. That means the return from land ownership, in the form of rent, can be free of tax.
Tax deductible rent from farmland
If young people rent the farmland from their parents’ SMSF, they must pay rent, cautionsRogers. But the rent is a fully tax deductible business expense and reduces the taxable income of those continuing the farm business. This also applies to any other tax structure that the farmland may be held within.
SMSFs are regulated and they can only own and use assets as permitted. “In our example of an SMSF owning farmland, the SMSF trustee must deal with a tenant on arm’s length terms,” notes Rogers.
This means a person running the farm cannot receive favourable treatment and potential beneficiaries can be assured that their inheritance, at least in this regard, is being dealt with equitably. The SMSF member, (the person who takes out the fund), may direct how the SMSF proceeds are to be apportioned as a death benefit. It’s difficult, though not impossible in some states, to challenge this distribution.
While the fund member and the beneficiaries can have a high degree of certainty of outcome, Rogers recommends investigating further estate equalisation strategies through a financial adviser.
Leasing rather than buying a farming property
Often, younger farmers don’t have access to the capital needed to fund a farming property, says Rogers. They may prefer to focus on the farm business rather than face interest costs that would result if they bought the property with borrowed money.
“Don’t underestimate the financial leg-up offered by leasing – just make sure it ties in with the bigger financial picture,” saysRogers. “Leasing of property can be an important part of a family succession strategy for parents wishing to support younger family members, working in conjunction with superannuation and retirement plans, estate planning advice and appropriate personal insurance strategies.”