Key Takeaways
- Selling a farm has major tax and retirement implications, making early planning essential.
- Small business CGT concessions can significantly reduce or eliminate capital gains tax for eligible farmers.
- Up to four CGT concessions may apply, including the 15-year exemption.
- Sale proceeds may be contributed to superannuation, potentially outside standard contribution caps.
- Coordinating succession, tax and retirement strategies together can deliver better long-term outcomes.
Succession Planning When Selling the Farm
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.
Capital Gains Tax (CGT) Concessions for Farmers
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.
- 15-year exemption (which exempts the entire capital gains)
- 50% active asset discount
- Small business retirement exemption
- 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.
Using Farm Sale Proceeds to Fund Retirement
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. Strategic financial planning advice can help ensure this is structured in a tax-effective way.
How Does It Work? A Farm Succession Example
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.
Contributing Sale Proceeds to Superannuation
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.
Why Strategic Planning Matters When Selling a Farm
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.
Plan Your Farm Sale With Confidence
Selling the farm is one of the biggest financial decisions many farming families will ever make. Getting the structure right can mean the difference between unnecessary tax and a secure, well-funded retirement.
Speak with a Morgans adviser to align your succession planning, tax strategy and retirement goals under one clear plan.
Note: Tax examples provided are based on ATO rates as at February 2021 and are subject to change.
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.
FAQs
Can farmers access small business CGT concessions when selling land?
Yes. Farmers operating primary production businesses may be eligible for small business CGT concessions when selling farmland, provided they meet eligibility criteria such as the small business entity test, asset value thresholds and the active asset test.
What is the 15-year CGT exemption for farmers?
The 15-year exemption allows eligible small business owners to disregard the entire capital gain on the sale of an active asset if they have owned it for at least 15 years and are retiring or permanently incapacitated.
Can I contribute farm sale proceeds into superannuation?
In some cases, sale proceeds can be contributed into superannuation under the small business retirement exemption without counting towards standard contribution caps. This can provide a tax-effective way to fund retirement.
Do I have to sell the farm on the open market to access CGT concessions?
No. CGT concessions may still apply if the farm is sold or transferred to family members, provided all eligibility requirements are met and the transaction is structured correctly.
Why is succession planning important when selling a farm?
Succession planning helps balance family, tax and retirement outcomes. Without proper planning, farmers risk higher tax liabilities, cash flow issues for successors, or an underfunded retirement.
