A common frustration experienced by primary producers is that they cannot use their super savings in their business. Not being able to access your retirement savings until you are 60 (generally) and retired, can feel like you are diverting capital away from where it is needed.
One way around this frustration is to own all or some of your farmland in your Self-Managed Super Fund (SMSF).
Homework
Before going too far down this path you must ensure the land to be owned by your SMSF is ‘business real property’, i.e. the land, and buildings must be used wholly and exclusively in a business.
What about the farmhouse? Business real property used in a primary production business such as a farm can still meet this test even if it contains a dwelling used for private or domestic purposes – provided the dwelling compromises an area of land no more than two hectares and the main use of the whole property isn’t for private or domestic use.
This is important for two reasons:
- a SMSF cannot lease a property to a related person unless it is business real property, for that matter the related person can’t even use it, lease or not; and
- a SMSF cannot buy a property from a member or their associates unless it is business real property
Benefits
The benefits of owning farmland in your SMSF is the ability to access the tax-effective superannuation environment as well as having the added benefit of achieving asset protection.
How does it work? First, land ownership and business operations are separated. Land ownership is transferred to your SMSF while your business remains outside of your fund and under your direct control.
Then, the land is rented by the SMSF to your farming business at an agreed market rate. This provides tax-effective (maximum of 15%) rental income to your fund while the farm business gets a tax deduction for the lease payments.
When the members of the SMSF are in retirement phase and balances are within the $1.9 million transfer balance cap (for more on this topic see Do you and your spouse have more than $1.9 million in super?), all income (including capital gains) generated by the fund will be tax free, irrespective of whom rents the farm.
Another benefit of a SMSF owning the farmland is succession planning. Via a binding death benefit nomination (BDBN), you can ensure that assets (in this case the farmland) are transferred to a specified individual directly on your death rather than risk making the gift in your Will and your Will being challenged.
Stamp Duty
What about stamp duty? In South Australia, New South Wales, Victoria and Western Australia (with some local differences) transferring farmland between certain relatives and/or the trustee of their super fund is exempt from stamp duty.
Disadvantages
Before going any further, you need to consider the possible disadvantages of holding farmland in super.
Assets held in your SMSF cannot be used as security for business borrowing. A SMSF’s ‘sole purpose’ must be to provide benefits to its members upon their retirement or to their dependants in the case of a member’s death before retirement. Using the assets of your SMSF as security for borrowings is a breach of the ‘sole purpose test’ and not allowed.
There are also hurdles to borrowing to buy property in to a SMSF, not the least finding a willing lender! From September 2007, amendments to the superannuation legislation enabled SMSF trustees to borrow or gear their investment acquisitions, initially using instalment warrants (up until July 2010) and currently via a limited recourse borrowing arrangement (LRBA – from July 2010). The SMSF deed’s governing rules must specifically permit entering a LRBA. Further, the investment must also be consistent with the fund’s investment strategy. If not, there could be action to recover loss and damages by an aggrieved member.
There are additional conditions placed on property when it is used as security for a SMSF loan:
- The nature of an asset held as security for a SMSF loan cannot be changed; and
- Each loan must be for a single acquirable asset. Some farms consist of more than one title. Unless there is a substantial building straddling all titles – making it all but impossible for them to be sold separately – a farm with multiple titles is going to require multiple loans and multiple bare trusts if it is going to be purchased by a SMSF.
Additionally, a SMSF must not own more than 5% of its assets in ‘inhouse assets’. Knowing what is an inhouse asset is very important. For example, trees in an orchard are business real property because of their close connection to the land, yet annual crops are not! Generally speaking, an inhouse asset is one that can be removed from the farm without it damaging it or the farm.
Finally, while holding farmland is a definite advantage when the family is young, there are disadvantages if the land is crucial to other aspects of family wealth.
How will pensions will be paid upon retirement? Once a member reaches retirement age and must be paid a pension from their SMSF, the ‘accumulation account’ which was a line item in the balance sheet holding all the member funds is converted. It is transferred to a ‘pension account’, or multiple pension accounts, totalling up to $1.6m. This is all done with figures on a balance sheet, but in reality, the assets might be farmland and farmland is not divided between accounts so easily.
If the rent received from the farming business for the lease of the farmland is insufficient to cover the minimum annual pension payment this may lead to the need to:
- roll back the excess to accumulation phase (losing its tax-exempt status); or
- sell fund assets (for example, farmland).
When a SMSF member dies the payment of a death benefit is often required. If the recipient of the benefit is a spouse or ‘dependant’, the payment can either be in the form of a lump sum or income stream. However, if the death benefit is to a non-tax dependant (for example, an adult child), ordinarily the payment will need to be a lump sum. In this situation, a problem arises where the SMSF cash reserves are not adequate to cover the benefit payment, and therefore requires the SMSF to sell off assets (for example farmland). This in turn could trigger CGT consequences inside the SMSF, where assets such as the farmland are sold or transferred to the beneficiary in lieu of a death benefit payment.
Another death benefit payment problem may occur where a member of the SMSF passes away and their pension reverts to a surviving member. Where this ‘reversionary’ pension passes to a member and subsequently causes them to exceed their personal TBC ($1.6 million), the SMSF has two options to deal with the cap breach:
- the SMSF rolls back the excess to accumulation phase (losing its tax-exempt status); or
- more likely, the SMSF must pay out the amount.
If the latter option is occurs, this again may require fund assets to be sold and CGT consequences to arise.
For advice on all the options, including whether your SMSF Deed needs to be updated to accommodate the purchase or transfer of farmland, call us on 1300 654 590 or email wehelp@adlvlaw.com.au.
The information contained in this post is current at the date of editing – 6 September 2024.
https://www.ato.gov.au/super/self-managed-super-funds/investing/restrictions-on-investments/business-real-property/ ATO ruling SMSFR 2009/1
SMSFR 2009/1 paragraph 31. SMSFR 2009/1 at paragraph 223 also requires the farm to take up more than half the area.
https://www.sro.vic.gov.au/family-farm-exemption
https://www.finance.wa.gov.au/cms/uploadedFiles/_State_Revenue/Duties/Exempt_Family_Farm_Transactions_Transfer_Duty.pdf?n=6025
https://www.ato.gov.au/super/self-managed-super-funds/investing/sole-purpose-test/
SMSF lenders are shrinking by the day and only non-bank lenders offer commercial SMSF loans in the market.
Not just for example, irrigation or fencing.
https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Restrictions-on-investments/In-house-assets/
