Selling the farm? Don’t pay more tax than you have to

Succession planning is often a complex issue for our local farmers which needs attention and forward planning.

The small business retirement exemptions are an important component to consider that can reduce the taxation burden when selling land or transferring land to the next generation.

You may be eligible for capital gains tax (CGT) concessions - particularly if you are also considering retirement?

There are four types of small business CGT concessions available to eligible business owners (including farmers running primary production businesses) when selling the business.

1. 15-year exemption (which exempts the entire capital gains)
2. 50% active asset discount
3. Small business retirement exemption
4. Rollover due to a replacement asset being acquired

To qualify for any of the small business CGT concessions the business owners must first satisfy at least one of the following basic conditions:

• Be recognised as a small business entity and must carry on a business in the current year;
• Satisfy the maximum net asset value test or the alternative $2 million turnover pa test, or
• The entity (individual) is a partner in a partnership that is a small business entity, and the CGT asset is an asset of the partnership
• The asset must satisfy the active asset test.

Some or all the sale proceeds from the business can be contributed into superannuation which you can then draw on to fund your lifestyle in retirement.

So how does it work?

Consider the following simple example:

Steven and Tracey, both age 63, have been working their cattle and sheep farm for twenty-five years. They are now ready to retire and wish to sell the farm to their two sons, Jacob and Parker.

They purchased the 10,000 acre farm originally for $300,000. The current market price for the primary production business is $1.48 million, which Jacob and Parker have agreed to pay. Accordingly, the capital gain on sale is $1.18 million.

Their accountant has confirmed Steven and Tracey qualify as small business owners and are eligible for the 15-year concession as they have owned their farm for more than 15 years.

By qualifying for this concession Steven and Tracey can ignore any capital gains made as a result of the sale. This results in a significant tax saving for them.

As they are retiring, Steven and Tracey can contribute up to $1.565 million each (2020-21 FY threshold) from the sale proceeds into their superannuation fund without counting against the usual contribution caps. (ATO,2021)

Steven and Tracey are equal (50/50) partners so from the $1.48 million sale proceeds they can each contribute $740,000 into their respective superannuation member accounts.

This money can be used to commence superannuation pensions to support them throughout their retirement. Steven and Tracey are both over age 60 so their super pensions will be completely tax free.

As you can see, if you qualify for the small business CGT concessions significant tax savings can be made when you sell your business.

Also, by implementing an appropriate retirement strategy in conjunction with the sale of your business, you can also enjoy tax free income in retirement.

^{Note: Tax examples provided are based on ATO rates as at February 2021 and are subject to change.}

Need help?

Speak to one of our qualified and experienced Morgans Mackay Advisers today by calling (07) 4957 3033 or visiting the Morgans Mackay webpage.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited (Morgans) AFSL 235410 ABN 49 010 669 726 as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.