Farming trusts may attract new tax minimisation scrutiny

The Australian Taxation Office is reviewing the way families manage and distribute the earnings received from business trusts - a popular ownership structure in the family dominated agricultural sector.

The well established understanding that farming parents can spread their trust profit distributions to their adult children, thereby potentially diluting their own personal tax liability, is under scrutiny.

Trusts are widely used to accommodate the needs of family units where farmers' offspring or siblings may have varying levels of ownership responsibility and participation in what is frequently a multi-generational business.

In many cases family trusts operate as a holding vehicle to simplify the farm's ownership, or ownership of portions of farmland or other assets, or trusts may be an active trading entity generating profits.

Trust structures are particularly relevant when families plan succession strategies, notably by-passing costs and legal processes involved with eventually shifting ownership to the next generation.

The Tax Office has, however, flagged it is re-thinking guidelines for parents benefiting from trust entitlements, in particular where the accounts show trust earnings are distributed to children who may be at university or in low income jobs.

Typical disbursements might be $50,000 or $100,000 for each young adult.

The ATO's concern is the benefit of that income distribution is often being enjoyed by parents, not their offspring, either as a deliberate tax minimisation move, or to cover household costs and other expenses their children may incur on their behalf.

"Basically, if money from a family trust is going to be distributed to your children the ATO appears to be now asking if it actually benefits the children, or is it just a bookkeeping entry?" said rural accountant, Megan Inverarity.

"It's not uncommon to see family members who aren't directly involved in the business, or helping on the farm, listed as beneficiaries.

"It's probably been happening for decades, and there are no guidelines to say it's illegal."

It was difficult to guess what new specifications the ATO would settle on, but she said farmers should be aware changes would likely scrutinise use of children's lower marginal tax rates.

"People need to talk with their accountant and review what they previously regarded as legitimate tax options," said Ms Inverarity, a director with South Australian regional accounting firm Murray Nankivell.

"However, in many cases family trusts don't generate income to be distributed, so it's not an issue."

National Farmers Federation's chief economist, Ash Salardini, noted young family members often had "a fairly fluid" involvement with farm businesses and should not be automatically ruled out of dividends because they were at university or working elsewhere.

Many, if not most, young adults invariably participated on the family property, particularly at peak times such as harvest or shearing.

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NSW Farmers business, economics and trade committee chairman, Bill McDonnell, accepted it was appropriate for the ATO to ensure everyone paid a fair share of tax, however he hoped any modified rules and requirements were clearly communicated and would not negatively impact farm businesses.

"At the end of the day it is in everyone's interests that Australia has a strong farming sector that is sustainable into the future, and a fair tax system is part of that," he said.

"Keeping track of changes can be tricky, so it's important for farm businesses to get professional advice on managing tax affairs."

Meanwhile, Ms Inverarity noted farmers with self managed superannuation funds, which may include ownership of the farm, would be relieved the federal budget extended its relaxation of the annual minimum pension drawdown for 2022-23.

Pension withdrawal requirements will be at half the usual minimum figure, which normally starts at 4pc of the fund's value when self managed retirees turn 65.

"This will allow people to hold more money in tax effective superannuation in these uncertain times," she said.

"It will also help from a cash flow perspective for self managed funds with rural land, where those asset values have skyrocketed lately."

It was often a juggling act ensuring the annual lease paid by a farm operator (based on regular land valuations) was sufficient to cover the minimum SMSF drawdown.

"Regular pensions drawn from self managed funds can make cash flow tricky, given minimum drawdowns are calculated as a percentage of a fund's balance."