Planning for retirement from farming

Security of income is the main issue for family members retiring from active involvement in the farm business. This issue must be planned as part of the succession planning process well before retirement. Planning for retirement income could involve consideration of the following:

maintaining an income only interest in the farming business;
income generating investments such as shares or rental property;
pension and related benefits; and
superannuation.

Maintaining an income only interest in the farm

An income only interest in the farm may be retained after a family member retires. This can be achieved through beneficial interest in a trust or through a non-management interest in a partnership. However, the danger with this approach is that it may erode the capital available for the operation of the farm. Also, as the financial needs of the younger generation grow, either the income from the farm must grow to match changing needs or other sources of income must be found.

Pension and related benefits

Part of the succession planning process should take into account the possible receipt of a pension or other social security benefits in retirement. Unfortunately the rules governing these entitlements are constantly changing and you should seek advice from a professional that has up-to-date knowledge for these rules.

Entitlement to the age pension (and other benefits) is subject to asset and income tests, and for most retiring farmers the assets will be the biggest concern.

Three common situations may lead to the loss of pension entitlements:

joint ownership of assets: if your investments in real estate, term deposits, shares or managed investments are held jointly, then on the death of your spouse the whole of the value of the assets becomes assessable against you;
mutual wills: if you make your will so that your assets pass to your surviving spouse this may have a negative impact on your surviving spouse's pension rights; and
life assurance: if a surviving spouse owns the matured value of a life policy on the life of the first deceased, the survivor's assets will be substantially increased, with consequent loss of pension.

The issue of wills is dealt with in more detail later but it is important to note here that your best intentions could actually put your surviving spouse in a worse position in relation to the pension. When you are making your will, you should get sound advice about any impact your legacy might have on your spouse's pension entitlements.

For further information on the Income and Assets tests, see 'Social security' under 'Business, finance and income'.

See also the Law Topics section on: Social security (some content contained in Law Topics is specific to Victoria)

Superannuation

Farmers have traditionally been reluctant to 'lock up' cash in superannuation because they are conscious of the need for cash reserves in lean times such as drought. However, many are now seeing the importance of superannuation in generating income later in life.

There is now a growing interest in the value of self-managed superannuation funds (SMSF) in farm succession planning. Superannuation offers significant tax advantages, especially for those with high taxable incomes, and SMSFs can be an excellent long-term land holding succession structure for the reasons outlined below:

income tax concessions;
transfer of interests in farming land as contributions to a SMSF;
membership of SMSFs can now sign what is called a Binding Death Benefit Nomination, which ensures that any farming land held in the SMSF will, on the death of parents, pass down to the farmer's successor; and
land held in a SMSF is 'outside' your will and is therefore protected from any will challenge, provided a valid Binding Death Benefit Nominations had been signed by the members of the Superannuation Fund.

The creation and operation of a SMSF is very complex and should not be attempted without legal and taxation advice. Also it is important to appreciate some of the disadvantages of tying assets up in superannuation funds. Incorporating farm assets into a SMSF:

reduces the diversity of investments because failure of the farming business may also devalue the superannuation fund;
prevents funds and assets being accessed except as a result of death, retirement or disability;
means that assets cannot be mortgaged and so the opportunity to borrow is restricted;
will result in increased legal and accounting costs to operate the farming business; and
requires adherence to very strict legal and accounting requirements.

Where the parents have no farming successors and propose to lease the land out on their retirement, the use of SMSFs to hold land offers enormous income tax advantages because of the low tax rate and the fact that once pensions are commenced, the superannuation fund pays no income tax on its earnings upon the members' retirement. Also, as there is no Capital Gains Tax payable on any asset sold by a Superannuation Fund once its members have commenced to draw Pensions from the Fund, this can be a significant advantage.

See also the Law Topics section on: Superannuation(some content contained in Law Topics is specific to Victoria)