Has Your Farming Business Outgrown Its Structure?
Picture Glenmore, an established sheep and cropping business between Katanning and Kojonup. The family owns and operates about 9,000 hectares: roughly 5,500 cropped to wheat, barley and canola, with the balance carrying a self-replacing Merino flock of 7,500 breeding ewes. Four permanent staff work alongside seasonal shearing and harvest crews. Sarah Calder manages the operation with her parents. Her brother Tom is an engineer in Perth.
Mum and Dad own the land equally. They inherited the original holding in 1990 and bought the adjoining parcel in 2001, and a refinanced $4 million facility remains secured over the parcel acquired in 2001. A family trust has run the business from the start.
In a good year the business earns about $3 million before tax, and most of it stays on the farm. In a bad year the farm will break even. Yet the structure was established decades ago for a much smaller operation. That mismatch is where the problems start.
Illustrative tax facts
- Annual turnover: approximately $13 million
- Farmland: market value approximately $40 million, held by Mum and Dad with nothing leased or share-farmed, and retained outside the proposed company
- Land-related debt: approximately $4 million
- Livestock (ewes, lambs, rams and wethers): approximately $5 million market value; $1.1 million tax value
- Machinery: approximately $7 million
- Unpaid entitlements owed to family members: approximately $7.5 million
The Calder family and Glenmore are fictional and all figures are illustrative. The analysis scales up or down.
Success can expose a tired structure
The pressure comes from the profit. A trust generally allocates its net income to beneficiaries each year; the cash can stay in the business, but each appointment creates an entitlement owed to that beneficiary. Over twenty years those balances become large. The Calder trust now owes about $7.5 million to Mum, Dad and Sarah, and nobody has received that money.
Those entitlements complicate death, estate equality, banking and any later restructure. The structure is doing a job it was never designed to do at this scale.
What actually changes in a company
A private company is a taxpayer in its own right. A company with aggregated turnover below $50 million will generally qualify for the 25% rate where no more than 80% of its assessable income is base rate entity passive income. A trading farm company of Glenmore’s size will usually satisfy both tests; a company living mainly on rent or interest will not.
On $3 million of profit, the difference is significant. Depending on how the trust income is allocated and on each beneficiary’s other income, the immediate family tax could be around $1.3 million or more. In a company it is $750,000. The gap is cash available for livestock, machinery and debt.
This is deferral, not exemption. When the company later pays dividends, shareholders pay top-up tax with credit for the company tax already paid. The benefit is that the farm keeps the cash while it needs it.
A company also gives cleaner governance. Shareholders own it. Directors control it. Sarah can join the board and take real management authority without a single hectare changing hands on the same day, and a dividend policy can set expectations between the farming child and the off-farm child before they become a dispute.
Why the land will often stay outside the operating company
Making the decision to sell the farm into a company is usually the wrong one. The business is not one asset: it is land, livestock, machinery, grain, contracts, employees, debt and twenty years of trust entitlements, and each piece can produce a different tax result.
The land deserves separate treatment for three reasons.
Companies cannot use the general CGT discount, and the land carries the family’s largest unrealised gain. Even the CGT indexation on a large asset over time is worth accessing – and companies don’t get that indexation.
Western Australia exempts transfers of farming property between family members from transfer duty. A transfer of land into an operating company should not be assumed to qualify. Keeping the land with Mum and Dad may preserve access to the family farm exemption if the statutory conditions are satisfied when the later transfer occurs.
Land held outside the operating company sits away from ordinary trading risk. That separation remains subject to the mortgages, guarantees and cross-collateralisation required by the family’s lender.
The working answer for the Calders: Mum and Dad keep the land, and the company pays them market rent under a written lease. The rent services the $4 million facility and funds their living costs without unnecessary salaries.
The lease is a core part of the succession plan, not merely a tax document. It should deal with term and renewal options, rent review, capital improvements and infrastructure spending, a right of first refusal if the land is ever sold, death or incapacity of a landowner, default under the bank facility, and what happens if the planned succession does not proceed, all coordinated with Mum and Dad’s wills and enduring powers of attorney. Sarah cannot build a business on land the company might lose access to.
One moving part sits behind the table: during the transition the trust and the company operate together through an interim partnership, and the company becomes the sole operator only after the livestock transition in Part 3 is complete.
Company money is not the family cheque account
Money in the company’s account belongs to the company. The family cannot draw it and decide the tax treatment at year end.
Sarah and anyone else working in the business can be paid wages, which brings superannuation, workers compensation and, where the employer or payroll tax group’s Australian taxable wages exceed the threshold (currently $1 million), WA payroll tax. Mum and Dad can receive rent, and shareholders can receive franked dividends when profits and franking credits allow.
Salary, rent, dividends, documented expense reimbursements and repayments of amounts already owed each have a legitimate basis. Undocumented private drawings may instead be treated as loans, and a loan from a private company to a shareholder or associate can result in a deemed dividend under Division 7A unless an exception applies or the amount is repaid or placed on complying terms within the required period.
A few years of undocumented drawings can quietly rebuild the problem the restructure was meant to remove. Decide the cash rules before the company starts trading.
Concessions the family gives up
It is important to acknowledge that corporatising the family farm has a cost.
Company profits do not qualify for primary production income averaging, and only individuals can hold farm management deposits, capped at $800,000 per person. If the owner of the FMDs stops carrying on a primary production business for 120 days or more, the deposits are treated as repaid and become assessable. And if rent and other non-primary-production income exceed $100,000 for the year, that individual cannot make a new deposit.
The family should also list any amounts still being spread under elections for forced livestock disposals, insurance recoveries or double wool clips, because ending the trust’s farming business can bring the deferred balances into assessable income at once. The date the old entity stops farming must be chosen deliberately.
Talk to the bank before you draw the diagram
The $4 million facility is secured over land that will stay with Mum and Dad, while the income that services it moves to a new company. No restructure of this size proceeds without the lender’s consent, and the bank will want guarantees, cross-default terms or a refinance. In practice, lender consent is often the first real hurdle. Bring the lender in early.
And stress test the numbers through a poor season, not only a good one. Rent to Mum and Dad, the land debt, company working capital, machinery replacement, family drawings and, in time, Sarah’s equity payments and any equalisation for Tom all have to be funded in the years when the profits are not there.
What the transition means for Sarah
Sarah becomes a director and continues as operational manager under a written employment arrangement at market remuneration. Over an agreed transition period, typically three to five years tied to management handover, performance, valuation and Mum and Dad’s retirement date, authority passes in stages.
Equity is then transferred or acquired under a valuation and funding method agreed with Sarah in advance: it can be an independent valuation or an agreed formula, often with vendor finance that can flex in a severe downturn. The shareholder agreement, lease, bank arrangements and estate plan should deal consistently with death, incapacity, sale, deadlock and release of personal guarantees. Sarah’s salary, entitlement, dividends and equity remain separate economic matters. Later is not a succession plan.
Fair to Tom without a deadlock
Fairness between Sarah and Tom does not necessarily mean equal voting control of the farming company. Control of operations, entitlement to income and participation in family capital are separate decisions. An equal shareholding can produce an operating deadlock where only one sibling runs the farm. And Tom is not on the farm. Other assets, land interests, non-voting economic interests, insurance, deferred payments and testamentary arrangements can all balance the ledger without splitting the steering wheel.
Start with a map of the whole balance sheet
The first meeting is not about a company name. It is a schedule: every land parcel and its owner, livestock and machinery values, finance contracts, grain on hand, farm management deposits, water licences, CBH equity, trust entitlements and related-party loans. The schedule decides what moves, what stays, and which rollover is worth testing. Part 2 works through the rollover choices; Part 3 deals with the livestock, the entitlements, GST and duty.
Common questions
A company changes when tax is paid, not whether it is paid. Profits kept in the company are taxed at the company rate now, and shareholders pay top-up tax when dividends are paid later.
Usually not. A company cannot use the general CGT discount, and a transfer of farming land to a company should not be assumed to qualify for the WA family farm duty exemption.
Company profits do not qualify for either. Existing deposits and averaging need a transition plan with a deliberately chosen changeover date.
The next step
Westcourt Private Business Accountants acts for successful commercial WA farming families. Before any documents are drafted, ask us for a structure review: an asset-by-asset map of the land, livestock, machinery, debt, deposits and trust entitlements, with the tax cost and the sequence for each option. It is a fixed-scope piece of work and it comes before everything else.
The Calder family and Glenmore are fictional and the figures are illustrative. This article is general information, not advice on your facts.
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