It is quite often the case that the family farm has either passed to mum and dad (the patriarchs) from their parents or mum and dad have built it up and purchased the family farm/s and have worked it to a successful family business. It is quite often the case that some of the children remain on the farm and work very hard for less than market salaries on the understanding that they will be the ultimate beneficiary of the farm business upon either the retirement or death of their parents.
When succession planning for the family business it is important that any legal plan recognises this along with those children that are not involved in the business.Similarly, as a family business involves levels of emotions not involved in other business dealings, issues that have simmered below the surface for many years may need to be addressed as part of the planning process.
KPMG and Family Business Australia’s Family Business Survey 2015 noted that 80% of family businesses had experienced conflict in the 12 months prior to the survey and common sources of conflict in the operation of family businesses include:
- future visions, goals and strategy;
- balancing family versus business;
- lack of family communication;
- succession related issues;
- financial stress;
- inability to manage growth;
- how decisions are made;
- competence of family members in the business;
- lack of family communication with non-family operators;
- remuneration; and
- sibling rivalry.
Of those surveyed 64% intend to pass ownership of the family business solely to family members.
Naturally, this becomes even more complicated when some members of the next generation are not actively involved in the business.
Let’s consider the Sinatra Family scenario:
Frank and Nancy Sinatra own two cattle stations (Bryce and Zion) in North Qld.
The Bryce farming business is operated out of the Sinatra Family Discretionary Trust since Frank acquired his first property (Bryce) in 1985. The Zion farming business is owned and operated out of Sinatra Properties Pty Ltd.
Fred has recently obtained current valuations on the properties and assets as part of renegotiating his loans with the bank and the current estate planning.
Frank is 80 and Nancy is 75. Frank and Nancy live at Zion Station and have their own residence on the property.
The Sinatra’s have five adult children:
James (49) works on the cattle business at Zion with his wife Penny
Freddie (47) works on the cattle business at Bryce with his wife Margaret
Samantha (45) an accountant
Leonard (42) an engineer
Frank Junior (39) unemployed.
James and Penny have three adult children – Leonard who is 25, married to Selina with one child and work and live at Zion; Sophie 23 who is at university studying accounting and Olivia 18 who is at Art School in Melbourne.
Samantha is recently divorced with three children Jane 15, Michael 13 and Joshua 9 who are all still at school.They all live in Sydney.She shares joint custody with her ex-husband John.Samantha and her children visit Bryce at least twice a year for working holidays.
Leonard is married to Elizabeth – they have no children.They have no interest at all in the farm businesses.Frank and Nancy have gifted substantial sums to Leonard to enable him to establish his niche engineering firm (approximately $1.5million)
Frank Junior has been estranged from the family since he was 25.He lives in Colorado, USA. He had serious drug dependency and gambling issues which led to his estrangement from the family.
Things have become quite strained between Frank and Nancy and James and Penny as James and Penny have mounting debts in relation to the education expenses for their children. James has worked Zion Property his whole life and has drawn fairly meager wages over the course of his working life. He has preferred to put everything back into building Zion.Frank and James had a heated discussion recently about how James has worked himself to the bone but his other siblings seem to reeking in the benefits of his hard work.
Frank has recognised this for some time and has been talking to his accountant and lawyers about the possibility of transferring Zion to James and Penny now in recognition of all of their hard work. Frank has received an independent valuation on the property and business assets of $17million for Zion and $13million for Bryce.Frank and Nancy wish to retire from the cattle businesses. They want to ensure that they can retain their residence at Zion and also have enough money for a comfortable retirement along with providing for their other children when they are no longer around.
Frank has talked to his solicitor, accountant and bankers.As the Sintara Family Discretionary Trust owns Zion, Frank’s solicitors have reviewed the trust deed to determine whether the powers of the trustee include the power of sale of assets. The solicitors are satisfied that the proposed family restructure are within the powers of the trustee.
The discussion prompted Freddie to issue an ultimatum to Frank that he and Margaret have full ownership and control of Bryce Station or he will walk away.
After months of discussion Frank wishes to progress the family business restructure on the following basis:
- Frank and Nancy have the right to reside in their residence on Zion for as long as they both wish or until their deaths.All improvements, maintenance and operating expenses associated with the residence are to be borne by James and Penny as they will receive the ultimate benefit of those items;
- Frank will completely step back from all business operations;
- Frank and Nancy will be released from all debts associated with the properties (bank debt $3.9 million). As the value of Zion is substantially higher than Bryce, Frank wants the debt to be apportioned between James and Freddie in the ratio of 75:25 i.e. James will take on debt of $2,925,000 and Freddie will take on a debt of $975,000;
- Frank and Nancy will receive a payment of $3.5million to be paid proportionately between James and Freddie in the ratio of 75:25 i.e. James will take on debt of $2,625,000 and Freddie will take on a debt of $875,000.
- The Sinatra Group bank managers are on board with the restructure and have indicated that they support a restructure of the loans to enable the splitting of the debt, release of Frank and Nancy from all obligations and providing funds to enable James and Freddie to make the lump sum payment to Frank and Nancy.
As the transaction involves the transfer of property and business assets stamp duty is a crucial consideration.Stamp duty may be assessed on the aggregated value of the entire transaction which based on current valuations of $30million is approximately $1.7million.
As this is a significant debt that is generally borne by the purchaser/acquirer, Frank asked his solicitors to consider whether any exemptions to stamp duty apply and has advised that:
- The transfer of Zion is a relatively simple transaction which will see the shares held by Frank (50 ordinary shares) and Nancy (50 ordinary shares) in Sinatra Property Holdings Pty Ltd transferred to Freddie (50 ordinary shares) and Margaret (50 shares). Ordinarily share transfers are not the subject of stamp duty.However, landholder duty (commonly referred to as land rich tax) will need to be considered.
- The transfer of Bryce is slightly more complicated as the assets are held by the Sinatra Family Discretionary Trust – Frank and Nancy are the Principals of the Trust.
Since 1 July 2016, the Law states that according to the Duties Act, there is a blanket concession for stamp duty for primary production businesses (regardless of whether the transfer is undertaken by way of gift or if consideration changes hands or any combination of those) provided that specific legal conditions are met.In such cases, the dutiable value of the business property is taken to be nil.
First and foremost for the concession to apply, the business property to which the transaction relates must be used to carry on a primary production business. As the family restructure transaction relates to the transfer of the complete operations of Zion and Bryce (both of which are used to carry on the primary production businesses) the first lega condition is satisfied.
Note for the purposes of the Duties Act, business property refers to land used to carry on a business of primary production or personal property used to carry on the business on the land which includes goods such as plant and equipment, water entitlements and livestock, but does not extend to other business assets such as business names or debtors.
As the overarching limb is satisfied consideration can now turn to the other essential elements.
Firstly, the transferor (or the person directing the transfer) is a defined relative of the transferee or otherwise an ancestor of the transferee.
For the purposes of the Duties Act, defined relative means:
(a) the person’s spouse;
(b) a parent of the person or the person’s spouse;
(c) a grandparent of the person or the person’s spouse;
(d) a brother, sister, nephew or niece of the person or the person’s spouse;
(e) a child or grandchild of the person or the person’s spouse;
(f) an aunt or uncle of the person or the person’s spouse;
(g) the spouse of anyone mentioned in paragraphs (b) to (f).
As Bryce is owned by Sinatra Family Discretionary Trust of which Frank and Margaret are the Principals, they are considered to be the persons directing the transfer and satisfy the defined relative requirement in order to give effect to the transfer of Bryce to James and Margaret.
As Zion is owned by Sinatra property Holdings Pty Ltd of which Frank and Margaret are the only directors and shareholders they are the persons directing the transfer and satisfy the defined relative requirement in order to give effect to the transfer to Freddie and Penny.
Secondly, the transferee must take the transfer of the business property in their personal capacity.
In both scenarios in order to take advantage of the exemption under the family business concessions the property and assets will need to be transferred directly to:
- In the case of Bryce to James and Penny in their capacity as individuals (cannot be to a company or trust).
- In the case of Zion to Freddie and Margaret in their capacity as individuals (cannot be to a company or trust).
Thirdly, the business for which the business property is used is carried on by the defined relative or ancestor, whether alone or with others.
This element is satisfied in both insurances as Frank and Nancy (with the assistance of others) carry on the primary production businesses at Bryce and Zion.
Lastly, the businesses of Bryce and Zion are intended to be carried on the intended transferee i.e. in the case of Bryce – James and Margaret intend to continue to operate Bryce as a primary production business and in the case of Zion – Freddie and Penny intend to operate Zion as a primary production business (whether alone or with others).
As all elements are satisfied the duty concessions will be available to this family restructure and as the dutiable value of the business property is taken to be nil pursuant to section 105, landholder duty will also be nil.
As this scenario sees the family restructure being able to make use of the family business concessions Frank’s accountant will need to consider the tax implications including capital gains tax and any discounts that can be applied; the trading stock where the market value of which exceeds the cost base; depreciation of items where the market value exceeds the written down value; any cattle levy as a result of the restructure.
Preston Law is one of the largest Law Firms in regional Queensland.Our friendly, experienced Lawyers have been providing legal advice to Queenslanders for over two decades.Contact us to find out how we can help you with your succession planning.
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