Practical Systems Super SMSF specialist Bob Locke told SMSF Adviser the ability for control of investments, combined with the opportunity to build assets outside of the family farm, meant self-managed funds were a significant value-add within any advice strategy for rural families.
“Farmers tend to be independent thinkers and like to be in charge of the wealth they create from their hard work, so self-managed funds usually appeal to them from the control aspect particularly,” Mr Locke said.
“They also understand the vast majority of their wealth is held in a single asset class, farming land, [so] accumulating savings in an SMSF provides an opportunity for them to accumulate other asset classes which are more diversified and can provide an income stream independent of the farming operation.”
SMSFs could also help in tax planning for farming families who built up significant deferred income through farm management deposits (FMDs), as if the owner of the FMD passed away or retired, the family could be liable for significant income tax on the remaining funds.
As well as helping to chip away at any tax liabilities, contributing to an SMSF could boost savings discipline and reduce the client’s reliance on seasonal income in their retirement, Mr Locke said.
“It can happen that deferred income can build up to significant levels over time and it may not all be represented by cash. In regard to the non-cash deferrals, at the time the income is deferred, the cash exists, but there can always be the temptation to put in the new fence line or buy a flash new tractor,” he said.
“Carving some of these available funds off into a savings vehicle like a super fund can be wise in these situations as it enforces some savings discipline.”
However, family issues were important for advisers to consider when managing an SMSF structure for rural clients, as it wasn’t always suitable to have all members of the farming family in the same fund, Mr Locke said.
“I have several clients who have started out with a four-member fund and then transferred the kids to their own fund so they can be more independent and simplify administration in the retirement phase,” he said.
“Having separate funds may be more desirable, but this may require some structured advice as it is simple enough to establish a new fund but not always easy to realise existing assets tax effectively to facilitate a rollover into the new fund.”
Thanks for those comments Grant. SMSFs owning rural land is certainly a strategy that is used. I would caution that there are considerable potential implications of this – for example; farming land is often used as collateral when borrowing to purchase additional land and that would be a problem if the land is currently owned in a SMSF. Another example is the potential cash flow implications of having to make market value lease payments to the fund each year. I think it is an area where advisers need to be extremely careful in considering all the relevant issues that may possibly arise in relation to these arrangements and making certain that clients fully understand all the risks and possible implications.
I have found over the past 20 years that the best strategy is to have the farm in the SMSF for mum and dad and providing an income for them in their senior years. The farm can then be passed out to the child working on the farm or if you get the strategy right left in the fund on the death of the parents. I did a strategy paper on this and it beats FMDs tax, wealth and family wise. Plus the property is protected from creditors. There are lots of ins and outs but happy to share my strategy paper.