Want To Use Your Super To Buy Your Cane Farm?
Want To Use Your Super To Buy Your Cane Farm?
Did you know that it may be possible for your superannuation to be used to purchase a cane farm well before retirement age?
However, using a Self Managed Superannuation Fund (“SMSF”) to purchase farm land can be complex and it may not be a suitable entity for everyone. This is because the management of SMSFs is highly regulated by law and there are lots of rules that need to be followed.
Quite often, we will see clients (who have obtained professional financial advice) transfer their farm to their SMSF. An example of this would be as follows:
The Facts:
Fred and Wilma Farmer own farm land in the Pioneer Valley valued at $600,000.
They have a mortgage to the bank for an amount of $400,000.
They have always made contributions to their individual super funds over the years and collectively have $650,000 in their super accounts.
They are sceptical of the share market and have their money invested in cash only so are not making a lot of interest off this investment.
The Advice:
They see their financial planner who suggests to them to set up a SMSF and transfer the money they hold in their separate super funds into this one SMSF. He then suggests that they use the SMSF to buy the farm land off them personally and pay off the mortgage. The SMSF pays Fred and Wilma the $600,000 for the land (the current market value of the land) and Fred and Wilma pay out the mortgage owed to the bank of $400,000. They are left with no personal debt and an amount of $200,000 cash. The SMSF then becomes the landlord and continues to receive a rental income from the farming business and a written lease is put in place.
However, in order for the SMSF to purchase the farm land off Fred and Wilma, who are related parties of the SMSF, there are three criteria that need to be met:
The land needs to meet the definition of “Business Real Property”;
The contract must be on arms length terms, and
The transaction must be for the sole purpose of providing benefits to the members of the SMSF on retirement.
“Business Real Property” is described as land that is used wholly and exclusively for one or more businesses carried on by an entity. Normally a house on a property would not be allowed, but the ATO has advised that they will consider a house located on a farm to be within the rules provided the residence is ‘incidental and relevant to the underlying primary production business’, and where:
The area containing the dwelling and used primarily for domestic or private purposes does not exceed 2 hectares; and
The domestic or private use is not the predominant use of the property.
“Arms length terms” means buying the farm for the current market value and on terms that an unrelated third party would buy the farm on. In the above example, the current market value of the farm land was $600,000, so the SMSF would have to pay Fred and Wilma $600,000 for the farm land.
If the SMSF is going to borrow money for the purposes of buying the farm land, then there are additional rules that also need to be complied with.
When using a SMSF, you need to be sure that everything the fund does is in accordance with all of the rules and legislation. Otherwise there are penalties, fines and possible exposure to higher tax.
In summary, using a SMSF to purchase farm land can potentially be a way to achieve land ownership that would otherwise not have been possible.
The above content is a very brief sample of a very complicated topic and is designed only to introduce you to this option. If you are interested in finding out whether it would be beneficial to set up your own SMSF or whether you should be using your SMSF to purchase farm land, please feel free to contact us, your accountant or financial planner to discuss further.