Purchasing farmland? What are your purchasing entity options?

October 19, 2023

Buying rural property is a significant financial decision and in our current climate you generally need to act quickly to secure the property. However, it is important to take a step back and consider how you will buy the property; in your personal name/s, in a trust or in a company, as the decision you make could have significant implications for you in the future.

In this article we set out the main types of purchasing structures we see for rural land and some important factors you should consider.

Individual ownership

 Owning farmland in your own name is a simple, inexpensive option. However, this option comes with high risk and little flexibility.

• Holding farmland in your own name does not provide you with any asset protection if things don’t go to plan.
• When implementing a family succession plan to transfer the farmland to the next generation there may be duty and capital gains tax implications, particularly if you want to transfer the farmland to a trust or company, rather than to an individual.

 Discretionary trust

A discretionary trust is the most common form of ownership we see for farmland, as there are many great benefits.

• Asset protection: property held in a discretionary trust will generally be protected against claims made against the individuals.
• Flexible income distribution: a discretionary trust will provide the trustee ultimate flexibility in terms of dealing with the trust assets and making trust distributions, as the trust can be managed for the benefit of your whole family (rather than just an individual landowner).
• Tax management: income or capital gains can be distributed to the family members best placed to manage the tax, resulting in lower tax for the family.
• CGT: on a sale of the farmland, the 50% general capital gains tax discount will be available.
• Estate and succession planning: discretionary trusts also allow flexibility in passing control of the property to the next generation, as the farmland doesn’t need to leave the trust until the vesting day, meaning you can pass control of the trust by changing the trustee and appointors of the trust without duty and capital gains tax implications.

The trustee of the discretionary trust can be an individual or a company. For best asset protection and ease of estate and succession planning, we generally recommend a company as trustee.

 Company with individual shareholder/s

A company with individual shareholders is another option for purchasing farmland, but how does it stack up against a trust:

• Asset protection: while the property is held by an entity other than the individual, the underlying value of the property will still be exposed to claims against the individual, as the individual will hold the shares in their own name.
• Flexible income distribution: only the individual shareholders can receive a dividend from the company, and there can be adverse tax implications if the shareholders or their associates receive a benefit from the company, so there is no flexibility.
• Tax management: the entity will be paying tax at the corporate tax rate (as opposed to the individual tax rates) which may make paying down debt quicker. However, there may be “top up” tax when you distribute the income or capital gain out of the company to the individual shareholders.
• CGT: on a sale of the farmland, the 50% general capital gains tax discount will not be available.
• Estate and succession planning: there is no flexibility as the shares are held by an individual, meaning if you want to transfer the shares in the company as part of your succession planning, you may have to pay duty and capital gains tax.

 Company with discretionary trust shareholder

 A company with a discretionary trust shareholder provides more benefits than a company with individual shareholder/s.

• Asset protection: because the shares are not held by an individual, the shares and therefore the underlying value of the property, will generally be protected from claims made against the individuals.
• Flexible income distribution: this provides all the flexibility of a trust.
• Tax management: tax will still be paid at the corporate tax rate, and you may still have “top up” tax on any income and capital gain distributed, but you do have the ability to distribute to the family members best placed to manage the tax.
• CGT: the 50% general capital gains tax discount will still not be available.
• Estate and succession planning: you have all the flexibility of a trust.

 Summary table

This table has a quick overview of the different options and some factors to consider:

Remember, if you are buying the property in a trust or company, the entity needs to be established before you sign the contract.

It is best to ensure you purchase the farmland in the appropriate entity from the outset, as transferring it later could be a difficult and costly exercise.

Contact a member of our Agribusiness team if you need advice on a purchasing entity to work out what option is right for you.