Planning the best tax structure deal for a farming business is not something to be rushed into at the end of the financial year.
If your family business is looking to reduce or eliminate tax or stamp duty implications ahead of a looming restructure, farm succession manoeuvre, or sale, the chances are everybody involved needs to be much more familiar with the way their enterprise operates.
Few people are enthusiastic about meeting lawyers, let alone tax lawyers – unless they need somebody to deal with a “realisation” event.
Then tax lawyers are soon fielding questions about potential tax bills.
But it is often too late if a realisation event is at your doorstep. Start planning early.
Tax planning is mostly about getting business owners familiar with their affairs and understanding what assets they have, who owns them, what liabilities exist, to whom are they owed, and are key contracts or people locked in?
The term “realisation” means different things to different people.
It may be selling the business to a competitor, to a corporate, bringing key people in, or even kicking them out.
It could be finalising an estate or succession plan or simply being familiar with how your enterprise operates.
It starts with a stock take of your existing structures, resources and understanding how they work together.
Identify if you are a sole trader, or use companies, trusts, partnerships or a mixture.
Do you have awareness of real estate, goodwill, intellectual property, licenses, equipment and trading stock values?
These points start any due diligence process when lawyers and accountants undertake a review to ensure “you have what you say you have and that they do what you say they do”.
From a legal and accounting perspective, it’s about checking provenance and history.
The better the provenance, the better the price and outcome of a realisation event.
Tax planning is mostly about getting business owners familiar with their affairs and understanding what assets they have, who owns them, what liabilities exist, to whom are they owed, and are key contracts or people locked in?
- John Ioannou
If dealing with private or family businesses, you also need to address family due diligence as these businesses heavily depend on individuals and the dynamics existing between them.
Understanding this is as critical as the due diligence relating to legal and accounting concepts.
Without it you are simply left with structures and assets that won’t necessarily have the same value when separated by the individuals who manage them.
In a corporate atmosphere it is common to recognise chief executive officers, managers and employees each having their own expectations and key performance indicators.
Such a rigid structure is unnecessary in most family enterprises, but it is naive to think family enterprises exist without an equivalent.
Identifying these roles and people usually makes dealing with tax, duty and commercial issues far easier.
Meanwhile, not all business assets are taxed the same way.
Some, such as real estate, are capital assets and may be realised so they are dealt with free of income tax.
Others, such as livestock, are revenue assets so gains on those are taxed at the marginal tax rates of the entity holding the trading stock.
The different tax profiles of assets often influence who holds them, which of course impacts the tax outcome on a realisation event.
However, there are no strict rules to be followed although usually individuals and trusts hold capital assets and companies hold revenue assets.
Partnerships are prolific in agribusiness as they provide flexibility for those relying on farm management deposits.
Once the different tax profiles of the farm’s resources makes sense, the next step is appreciating the opposing forces between buyers and sellers.
The best plan are made early so you can appreciate these differences, making informed decisions well in advance of a realisation event.
- John Ioannou is a partner and tax law specialist with McCullough Robertson in Brisbane
