Farmland in Self Managed Super Funds
Owning farmland in a Self Managed Super Fund (SMSF) can create a tax effective way of separating the farming operation from the ownership of the farmland, achieving asset protection in the process, but potentially placing future restrictions on the functioning of the farm business and the SMSF. Superannuation and land ownership is a complex area, so an Accountant and Solicitor that specialise in superannuation should always be consulted to obtain a clear understanding of the implications before acting.
A SMSF can own assets such as farmland, but cannot operate a business. However, a farming business can rent land owned by a SMSF at market value and claim a tax deduction for the rent. The advantage is that the SMSF is taxed on a concessional basis at 15%, which means the rent paid is sheltered from possible higher tax rates that could be paid by individuals or companies owning land. This means more money is available to invest. If the SMSF is paying a pension to members, the SMSF pays no tax on the rent and can obtain Capital Gains Tax benefits when the farmland is sold. A SMSF can borrow money to buy farmland using a limited recourse borrowing arrangement, but this is a complex process that needs to be clearly thought through to address current and possible future issues.
The disadvantages for the farm business is that the farmland owned by the SMSF cannot be used as security for any future borrowings. If a significant proportion of farmland operated by the farm business is in a SMSF, it can be difficult for the business to access additional capital to cover operating losses from a drought, or pursue expansion opportunities such as purchasing more land. Undertaking improvements such as new sheepyards, new buildings, or earthworks on farmland owned by a SMSF is not allowed, as the nature of the original asset has been changed (repairing an asset is allowed whereas improving an asset is not). The farm business may lose access to the farming land when a member of the SMSF dies, if the farmland has to be transferred out of the fund.
The disadvantages for the SMSF and its members is the cost and complexity of putting farmland into the SMSF. Also, any contributions of farmland to the fund must be within the contribution limits, which can be as a one-off non-concessional contribution up to $450,000 for an individual member, otherwise a concessional contribution of $25,000 pa for those under 60 or $35,000 pa for those over 60 years of age.
New farmland can be placed in the fund through borrowing, but the Trust Deed must allow for this to occur and strict rules must be followed. There is also an additional administrative burden. The investment flexibility of the SMSF can be compromised if a big, lumpy asset such as farmland is not achieving the investment goal of the fund. It is hard to convert half the farmland to another asset class that might be performing better. Also, the objectives and horizon of the SMSF may not align with that of the family farming business, which could create problems with future management and ownership transition.
Owning farmland in a SMSF may be one way to create more wealth, but the limitations of the structure need to be balanced against the benefits. Most family farmland is still commonly owned in individual or joint names. This remains a simple and versatile way of owning the most significant asset on most family farming balance sheets, especially where the business needs to expand by borrowing to acquire more land.