Does your farm have a succession plan?
Australian-owned family businesses are integral to the survival of small towns. They provide employment, encourage growth, bring money into
the community, and are a good indication of the economic health of the town.
What is succession planning?
Succession planning is an evolving process that ensures the continuation of a business through generations or through layers of management. Not having a plan can have many consequences and can place strain on family relationships, no matter how strong the family dynamics are.
Succession planning is the development of a plan that will allow a smooth transition of the business and any assets with minimal disruption to the business or, importantly, family relationships.
It is a challenging process - it is hard to talk about subjects like death, serious injury and divorce. Often family members will have different expectations in respect of future ownership of assets and aspirations in respect of involvement in the business. However it is better to understand and address these at the time of formulating the plan rather than have a family member challenge a Will following the death of the matriarch or patriarch.
What are the key components?
Succession has been referred to as a three legged stool as there are three equally indispensable parts of the process:
- Estate planning - transfer of ownership of family/individual assets.
- Retirement planning - transition of labour and management
- Business transition / Succession planning - transfer of management and/or control of the family farm business (or a part of) to another member(s) of the family.
What does succession planning achieve?
Getting a plan in place can take time, effort and a need to balance competing interests. However, a successful plan can achieve multiple goals:
- Continuation and growth of the business
- Smooth transition for employees, management, owners and family members
- Minimisation of taxes payable
- Facilitation of retirement for the current leadership generation
- Ability to retain control of the process and decision making.
Getting the structure right
The tax consequences of transferring assets can be substantial with the potential for stamp duty, income tax and capital gains tax to significantly erode capital available to the continuing farm business and / or the retiring farmer. It is therefore important to involve professionals early in order to develop a tax efficient structure, for example by accessing the small business capital gains tax concessions:
- 15-year exemption provides that an entire capital gain is exempt from tax. Furthermore it allows an opportunity to contribute additional amounts tax free into a superannuation fund
- The 50% active asset reduction, to reduce a taxable gain by 50%. This is in additional to the 50% general capital gains tax discount, reducing the capital gain by a total of 75%
- The retirement exemption which provides that up to $500,000 is tax free or can be contribute tax free to a superannuation fund.
In developing a succession plan, the following key questions could be asked:
- What are the needs and aspirations of each family member? Do they see a future for themselves working on the family farm? If so, what do they see as their roles?
- Does the successor have the necessary skills and experience? If not, what steps need to be taken to develop these skills?
- If there is no natural successor, what steps should be taken to enhance the value and maximise sales proceeds
- If there is more than one successor, should the plan treat them equally or fairly? For example, passing an interest in the family farm to a child not working on the farm may not be fair to a child who was spent many years working on the farm. Should the successor buy out the other family members, and if so, is it possible?
- Do I have enough money to retire on? What will be the source of income after retirement? Will it include income from the farm, or should I be self-sufficient?
- How will the transfer of assets be funded? Can the business support a higher level of debt, if needed?
- Do the key terms of a buy/sell agreement need to be agreed and documented now, to avoid confusion down the track and in the event that the transfer needs to occur sooner than anticipated?
- Outside the family, what are the key relationships (such as employees, suppliers, financiers and customers) needed to ensure the commercial aspects of the business?
- What is the correct structure to hold assets? Should assets be transferred to new/different structures beforehand?
- If the succession plan requires assets to be sold – now or in the future – then how can the value of those assets be maximised prior to sale? Have the assets been valued and analysed in the same way potential buyers would
Have you thought about your succession plan? Or is it something that you have put to the bottom of the pile to deal with another day? Need assistance? Phone our office on 07 4151 8898 and start the conversation today.