When done correctly, it is possible for an SMSF to help develop an agribusiness by owning a farming property that is used to operate a primary production business. It’s also possible for fund members or their relatives to live on the farm, provided it is done correctly. Well, how can it be done?
SMSFs are permitted to own farming property in two ways. It can be owned by the fund directly or purchased using a limited recourse borrowing arrangement where the property is mortgaged and held in a custodian trust until the property has been paid off.
The SMSF that owns the farm can lease it to anyone providing it is done on an arm’s length commercial basis. The arm’s length requirement means that anyone running the farm cannot receive favourable treatment. Potential beneficiaries can be assured that their inheritance from the fund is being dealt with equitably. Usually, the farming property will be leased to a related party, such as the SMSF’s members, trustees, relatives or a trust or company controlled by related parties and their families.
All complying superannuation funds, including SMSFs and small APRA funds, are taxed on a concessional basis with a standard tax rate of 15 percent. However, there is no tax on the proportion of the fund that is used to support income streams that are in the retirement phase. The generous low tax rate shelters the rent received by the fund from the higher tax rates applying if individuals and companies owned the farm.
Creditor protection is another benefit of owning a farm in an SMSF. It can effectively protect property and other fund investments if the members run into financial problems and become insolvent. It means that creditors cannot access any assets of the superannuation fund, including the farm. The only exception is when members make contributions or transfer investments to the fund in an attempt to defeat creditors.
The fund members, trustees and their relatives can live in any residences that are built on the farm, provided they are paying rent to the fund, which is calculated on an arm’s length basis. This is the rare exception where a related party can use property that is owned by an SMSF for private or residential purposes from the area set aside for residential or personal use and is not permitted to be any more than 2 hectares (approximately 5 acres). However, anyone who considers a hobby farm may meet the criteria will need to think again as it must meet the ATO’s requirements as an ongoing primary production business.
As an example, a farmer who has ceased working a farm to retire may lease the property to a relative, such as his son or daughter, to carry on the family business. The farm could be leased directly to the child or to a trust or company that carries on the farming business. The amount paid for the lease would need to be on an arm’s length basis to comply with the legislation and should be documented in a formal lease agreement. If the farm was a growing concern, then the rent would be tax-deductible to the lessee, and the fund would be taxed depending on whether the members were in the accumulation phase, at 15%, or retirement phase, which is tax exempt.
Another example could be someone who is a member of an SMSF that owns a vineyard leased to a wine company. The property includes a residence on an acre of land in which the member and his family live. Providing the property, including the private use of the property by the member, is on an arm’s length basis, then it should qualify under the superannuation rules.
Anyone considering purchasing a farm as an investment of their SMSF needs to consider whether it is a suitable investment in the first place. Once it is in the SMSF, there are strict limitations that may apply to the lease of the property and accessing any superannuation benefits should an unexpected event happen to the fund members.