What is the role of the accountant and what must they do to ensure their clients are getting the essential services?

Take home messages

• The statutory essentials for your business are just the start.
• There are a significant number of extra services that Byfields considers to be essential - they are not "add-ons".
• Without these, dollars will be left on the table through a lack of planning. In extreme cases, farm viability can be put under threat without adequate planning.
• Regular contact with your accountant throughout the year is an absolute must for these services to be delivered. He/she is also a key for arranging the involvement of other specialist service providers such as lawyers, insurance brokers, etc.
• A quality accountant is:

1. good technically - a specialist in his/her industry, and primary production taxation is certainly a specialist industry,
2. has a natural interest and passion in what he/she is doing, and;
3. equipped with the resources to provide their services.

Disclaimer:

This paper provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

Liability limited by a scheme approved under Professional Standards Legislation

Statutory essentials

Your statutory requirements include your annual income tax returns, quarterly or monthly BAS's, and your ASIC reporting requirements.

These obviously need to be done, and they should be done well. Ensuring they are done properly does add some value to your business.

Ensuring they are done on a timely basis, ideally before harvest and certainly before the end of February the following year, is important, as it allows the delivery of the additional services that we believe to be essential. It also gives actual tax figures for your budget and gives your bank important information for your bank review.

Income tax planning

In high income years, start your tax planning before harvest! By selling all of your grain before a tax review, a key tax planning opportunity of deferring grain contracts is missed.

Check the fine print on your deferred grain contracts. If it is deferred payment rather than deferred settlement, this could be a problem.

At least one tax review is important, even in low income years. You can take advantage of low income years to utilise small business tax relief (trading plant, selling land) that may not be available in average or above-average seasons. Some government concessions such as health care cards and Family Tax Benefits may be obtained immediately after the review.

Have your main tax review done as soon as the budget is completed. If significant funds are required for tax planning, you can advise the bank in February/March, rather than late June.

Ensure this is a comprehensive review, not a back of an envelope calculation. You can always double check the February/March review with a mid June follow-up.

Tax planning should not just be about bringing some costs forward or deferring income; this will catch up with you eventually. Consider the following list of steps that could provide a permanent reduction in your average rate:

1. Owning plant in a company beneficiary.
2. Farm Management Deposits.
3. Primary production income averaging for your children aged under 18, and using FMD's in the year they turn 17.
4. Superannuation contributions to ordinary funds. There are limits to what can be contributed each year, but in certain circumstances, you can make two contributions in the same year.
5. Superannuation contributions to a Government Employee Superannuation Board (GESB) fund. There are special rules that make this a major "free hit" but make sure your accountant is using a licensed adviser to assist.
6. Lease payments to your superannuation fund for land owned by it.
7. Willing shares in a company beneficiary and other income earning assets to testamentary trusts; takes advantage of low tax rates for children.

Ultimately, a key focus should be on your rate of tax, not just the final number. A business paying $150,000 tax at a rate of 15% on a $1,000,000 profit is a much better result than a business paying $50,000 at a rate of 33% on a $150,000 profit.

Lastly on the subject of tax planning/management, ensure that it fits with your overall business management, long term planning and estate planning strategies.

Structuring

Is your trading entity a partnership with fixed income allocations or a trust with full discretion to allocate income or a company that pays its own tax?

Ensure you understand the legal implications of your structure in full.

Should your son/daughter be immediately included in your trading entity when joining the farm business? Will this put their off farm assets (if any) at risk?

Similarly, should the older generation stay in the farm business structure on retirement? Again, what assets are at risk versus what control are they handing over by exiting the structure?

If you are buying land, ensure you get the ownership structure right. If it is a $2,000,000 land purchase, spending $2,500 on the right trust deed and corporate trustee is money well spent.

Your accountant should be crucial in this regard. If your accountant is completing only your statutory essentials, who is reviewing the bigger picture issues? Your accountant's tax knowledge is crucial, but so is his/her ability to engage the relevant expert when required.

Succession and estate planning

We see the accountant's role in succession and estate planning as follows:

• Promoting the need for discussions.
• Documenting the discussions and noting particularly a timeline of events that should happen.
• Being aware of the technical aspects of the succession; the income tax, capital gains tax and transfer duty implications of any steps (see below).
• Then bringing some accountability to the table.

This is effectively a project manager's role.

Income tax - succession

When moving between entity types (e.g. partnership to a trust), plant and livestock needs to be transferred at market value, unless you are a related party for tax purposes.

Market value will generally lead to significant income tax payable given both livestock and plant are usually carried in the accounts of the old entity at tax or written down value.

Be especially careful of moving from a partnership to a trust at the beginning of a new cropping season, rather than at the end of a financial year. There is potential for large distributions of partnership income to individuals, while the losses from cropping costs are stuck in the new trust (as trusts cannot distribute losses).

Capital gains tax - succession

There are significant concessions available for capital gains on "active" assets e.g. a $2,000,000 capital gain on a farm land sale can result in tax payable of $0, or tax payable of $459,947!

BUT, in the spirit of there being no such thing as a free lunch, the exemptions are complex, especially where multiple entities are concerned, and one seemingly minor detail can see the entire exemption fall over.

Some basic conditions are that your business must turnover less than $2,000,000, or that your net assets must be less than $6,000,000. But not all of your assets are necessarily included and turnover can be managed in some cases. Don't write off the possibility of the exemption until you have spoken to your accountant.

Be organised and plan early. Not everybody knows a sale is coming, but if it is planned, advise your accountant as soon as possible. One particular test that can lead to obtaining the exemption is your level of trust distributions in any of the four years leading up to the sale i.e. the way your trust income is distributed in 2015 could help you get an exemption in 2019.

Yet another condition is the time your asset has been actively farmed versus the time it has been leased. If you are looking to lease before selling, get some advice first!

Transfer duty concessions

The transfer duty exemption on farm land that is transferred between generations is well known. As an example, duty on $2,000,000 worth of farmland is $96,915, so it is a useful exemption to say the least.

BUT, as for the capital gains tax exemptions, the law surrounding the exemption is complex, particularly where the farm trading entity is anything but a partnership between individuals.

Up until December 2013, we found that most of the exemption applications were obtained with minimal changes to business structures. Now that rate would be 1 in 10.

Plan early!

Wills

Make sure your will is consistent with your overall succession plan.

For example, your intention might be for Child A to take over the operation of the farm upon your death, but if your trust deed appoints your Legal Personal Representative as the appointor and guardian of your trust (trading or landholding) that might be Child B, or even a person who is not a family member.

Make sure your lawyer is fully informed of the ownership structure of your land, and your overall trading structure. A good structure diagram provided by your accountant, along with all of the trust deeds of variation, will greatly assist. Due to WA title law, it is not always clear who owns land, as only the trustee of a trust (not the trust itself) can be recorded as the owner.

Life insurance and superannuation

Take specialist advice in this regard as it generally requires a licensed adviser, but get your accountant and legal adviser involved.

Life insurance held through superannuation can be tax effective during the insured's lifetime but very expensive on death.

Also make sure that the insurance proceeds get to where they are intended. If for example, the life insurance in superannuation is to pay down the debts of the farm business, does that mean it will go to the farm? Or does the binding nomination on the fund, which generally overrides the will, send it to the surviving spouse who may or may not remain on the farm.

Similarly could the surviving spouse and possibly young children be left destitute because the farm business debt has swallowed up the life insurance intended for the young family?

Two separate policies could be the answer in this case.

Land owned by the superannuation fund

Having land owned by the superannuation fund can be extremely tax effective, but keep your long term plan in mind. If your superannuation fund is for your off-farm children, and the farm is going to those on farm, how does this strategy affect that plan?

Conclusion

The statutory essentials for your business are just the start.

There are a significant number of extra services that Byfields considers to be essential; they are not "add-ons".

Without these, dollars will be left on the table through a lack of planning. In extreme cases, farm viability can be put under threat without adequate planning.

Regular contact with your accountant throughout the year is an absolute must for these services to be delivered. He/she is also a key for arranging the involvement of other specialist service providers such as lawyers, insurance brokers, etc.

A quality accountant providing essential services is:

• good technically; a specialist in his/her industry, and primary production taxation is certainly a specialist industry,
• has a natural interest and passion in what he/she is doing, and;
• equipped with the resources to provide the above services. Many accountants are so busy just doing statutory essentials that they never get the time to consider the additional services that are really important to you.

Contact details

Craig Lane (Merredin)
08 9041 6100
craigl@byfields.com.au

Simon Northey (Northam/York/Beverly)
08 9621 3200
simonn@byfields.com.au

Dale Woodruff (Narrogin and Wagin)
08 9853 9300
dalew@byfields.com.au              

Neil Hooper and Jon Bush (Belmont)
08 6274 6400
neilh@byfields.com.au
jonb@byfields.com.au