Structuring for success

Agribusinesses run in a complex environment where they are affected from everything from weather/climate, legislation to foreign currency movements. All of these influence the businesses profitability and potential tax obligations.

As a result, the structure of your agribusiness group is pivotal. It empowers you to mitigate tax burdens, accumulate wealth, and protect your assets against unforeseen threats. Allow us to take you on a journey through the past and present of agribusiness structures.

The past: A simpler time

Long ago, farming entities operated within uncomplicated frameworks. Typically, husband and wife partnerships oversaw the entire operation, from running the farm to owning the equipment. Land was either held jointly or individually owned by them. The simplicity of this structure was cost-effective, granting access to primary production tax concessions such as farm management deposits and primary production averaging. However, the drawback was apparent: any profits could only be realised at the primary production averaged marginal tax rate. Furthermore, in the unfortunate event of legal disputes, all business assets were exposed to risk.

The dawn of trusts

With the advent of capital gains tax, discretionary trusts emerged as the favored vessel for managing farmland and farming enterprises. All trusts necessitate a trustee, which can be an individual or a company. Opting for a company as a trustee provides superior asset protection and removes the need for notifying the land titles office in case of ownership changes.

The merits of a discretionary trust are diverse. Profits can be distributed tax-effectively, while individuals still enjoy access to primary production tax concessions. Additionally, the appointor of a trust wields ultimate control and can change the trustee via a legal document. This flexibility enables the seamless transfer of trust assets to a new owner without incurring capital gains tax or stamp duty.

The popularity of trusts as landholders has been particularly high in South Australia as there are no restrictions on how long a trust can last.

Nonetheless, it's worth noting that trusts have their limitations, mostly that losses are quarantined.

Harnessing the power of companies

Historically, companies were not the preferred trading entity within agribusiness structures, save for their role as trustees. Equipment and land companies were sporadically part of a group, while trusts assumed the trading entity mantle. This arrangement allowed assets to be strategically moved away from the trading entity for the sake of asset protection, with the company as a beneficiary of trust profits. A caveat, though: companies do not enjoy the capital gains tax discount, necessitating careful consideration when being considered as a land holding entity.

Opting for a trading company restricts individuals' access to primary production tax concessions, as primary production income is quarantined within the company. As with trusts, losses incurred by the company are also isolated.

However, the recent introduction of a base company tax rate of 25% has breathed new life into the concept of using companies as trading entities. This is especially enticing because the individual marginal tax rate currently stands at 32.5% beyond $45,000, making it 7.5% higher (plus Medicare Levy).

Furthermore, structuring shareholders of this company as a trust can ensure dividends are disbursed in the most tax-efficient manner.

Finding your ideal structure

The ideal structure for your agribusiness hinges on a multitude of factors, including your risk appetite, consistency of profit, and the nature of your enterprise. What is paramount, however, is that you comprehend the intricacies of your chosen structure and the rationale behind it. If you find yourself in uncharted territory, do not hesitate to seek guidance from your advisor.

Should you discover that your existing structure falls short of your aspirations, rest assured that numerous rollover provisions are available to optimise your arrangement without incurring undue tax liabilities.

For a comprehensive review of your agribusiness structure, we invite you to reach out to one of our Brentnalls agribusiness specialists. We are committed to empowering your success in the ever-evolving landscape of agribusiness, where astute structuring paves the path to prosperity.

Disclaimer

The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.