These families will switch inheritance plans after new $3m super cap

According to accounting and consulting firm RSM Australia, which boasts one of Australia’s biggest rural practices, this is not only sparking conversations among, particularly younger, farmers about taking their land out of their self-managed super funds, but further undermining their faith in the superannuation system.

The key reason is not hard to understand – it’s the taxing of unrealised capital gains. This is despite an Association of Superannuation Funds of Australia (ASFA) research report claiming only 1 per cent of SMSFs with balances exceeding $3 million have farm-related income – a conclusion that was extrapolated from ATO data that lacks the necessary details.

The reality for farmers on the ground is very different.

The proposed tax has become a red-hot issue in the bush because farmers, attuned to the cyclical nature of their earnings (think recent floods and fires), can easily perceive the situation where the rising value of their land will increase their tax bill in the same year they have not generated any income. Although that reasoning might be hard to appreciate in Canberra, it’s not difficult in rural Australia.

Crunching the numbers

The assumption by Treasury seems to be that rising land values will translate into higher revenue as lease yields increase. But figures from RSM Australia should disabuse anyone of this notion. It has crunched the numbers for four farming districts in Western Australia – Dowerin, Grass Patch, Cunderdin and Albany – and discovered a wide discrepancy between farmland and leasing values.

Between 2021-23, farmers saw their land values rise strongly – ranging from 84 per cent for Grass Patch (from $2176 to $4000 a hectare) to 53 per cent in Dowerin ($5000 to $7665). With crop prices high, these farmers enjoyed record yields. Consequently, they looked for opportunities to expand but, with limited land available, it pushed prices higher.

These rising land prices were, however, largely uncorrelated to leasing values. In the four farming districts, leasing price increases ranged from nil at Dowerin ($136) to just 14 per cent at Albany ($220-$250) and Grass Patch ($108-$123), and 43 per cent at Cunderdin ($160-$229). Although lease rates vary for many reasons, the area and underlying use of the land are the prime factors, not the actual price of the land. Lease yields are very specific to the property itself – and this critically important fact explains why lease yields can vary and be low for some primary production land.

So the assertion that a “commercial yield” should always generate sufficient liquidity for the fund to cover a tax that is linked to movements in the underlying land value lacks commercial realism in rural Australia.

What also needs to be understood is the cyclical nature of farming. Rarely a year goes by in Australia when part of the country does not experience an extreme event. So, although the farm business is not owned by the fund, a poor season will affect the flow of concessional contributions, and, therefore, a fund’s liquidity.

Tax problem

Under the current tax regime, the fund is required to pay tax only on the taxable income it receives, such as lease payments and concessional contributions. But under the new proposal, a personal tax liability can be generated if asset values have risen – despite no income being received.

Timing will also be an issue. A fund may have its tax assessed in relation to one year, but as it is assessed well after the end of that financial year, by the time the liability arises and becomes payable, circumstances may have changed – whether it be from an extreme event or the market price for their crops or livestock collapsing.

The potential result could be a situation where there is no income outside the fund to personally pay the tax and insufficient cash reserves within the fund to pay the tax. Research conducted by the University of Adelaide on more than two-thirds of the SMSF member population found more than 13 per cent of affected SMSF members would have experienced liquidity stress in meeting the new tax obligation if it had applied in the 2021 and 2022 financial years.

In the past, farmers have used their SMSFs to assist with intergenerational planning. The National Farmers; Federation estimates more than 30 per cent of farm businesses have SMSFs. Despite complications arising from managing duty, capital gains tax and contribution caps, it was a viable option. But RSM’s feedback is that for many farmers, this proposed new tax is the straw that will break the camel’s back, with farmers looking for alternative succession strategies outside of super, despite the costs this will entail.

The fact that corporate farmers are selling out supports the idea that lease yields will not continue to rise to generate the income they need. The introduction of this tax may only accelerate this trend for farmers who hold their land in their SMSF.

Make no mistake. This proposal will increase the financial pressures on farmers. As the March 2023 National Farmer Wellbeing Report highlighted, 45 per cent of farmers have felt depressed and 64 per cent are experiencing anxiety. The proposed tax can only be expected to compound this depressing reality.

With legislation to give effect to the new tax before parliament, and with the government seemingly wedded to the concept of reducing the super tax concessions for individuals with balances above $3 million, time is running out to find a more suitable solution.

This article first appeared in the Australian Financial Review