An opportunity to transfer land within your family comes up. This may be an intergenerational succession plan coming together, or may be a family member exiting farming. Immediately we start reviewing the WA Family Farm Exemptions to see how these can apply in order to avoid paying the dreaded Stamp Duty (aka Transfer Duty)!
The successful application of these exemptions can save hundreds of thousands of dollars in stamp duty. For this reason, in most cases, applying for these exemptions will be the best course of action, but not always.
This article considers some of the downsides of applying these exemptions, and some limited circumstances when it is best to not apply these concessions and pay the stamp duty – sounds crazy I know!
In order to apply the duty exemptions, here are some of the common trade-offs. In all cases below the new owner is a trust (being the preferred succession and asset protection vehicle):
- It is likely that you will need to ‘narrow’ your landholding trust (and possibly your trading trust) meaning you will lose the ability to allocate profit to a company for asset protection and tax management. This can also be problematic if you have already done this in the past.
- If the land will be leased in the future, or solar/wind farms are built, the above can also be a significant downside.
- The transferor (most commonly parents) will need to give up control of the landholding trust (can remain as beneficiaries).
- Restructure of the trading entity may be required adding extra administrative burden.
- Potential opportunity cost if land is purchased in a trust (required for duty exemptions) and not in a company.
Example 1
Farmland worth $8m being transferred from parents to daughter’s trust.
In this case, the narrowing of the trading trust and landholding trust caused minimal downside (and expected to cause minimal downside). Also the sheer size of the total saving made it worthwhile! Therefore the duty exemptions were claimed - $400,000 duty saving.
Example 2
Farmland worth $1m being transferred from parents to a trust earmarked for son. Potential stamp duty saving of $42,000.
In this case the trading trust needed to be closed (in order to claim the duty exemptions) which would have had large income tax cost. Therefore the duty was paid in order to avoid income tax, and keep more flexibility going forward. This also meant that the parents could retain control in the short term, and well setup for a smooth succession longer term.
In most cases applying for the duty exemptions will be the best course of action. However, go in with your eyes open, understand the future impacts, and make sure the amount of duty exemption claimed is worth it! – in some cases it may not be!
To discuss further please contact your Byfields accountant.