Capital Gains Tax and the impact it can have on your net result in a sale.
Three factors owners should consider before selling a rural property.
By Richard Brosnan.
After 20+ years selling properties throughout Central Queensland from Alpha to Albinia, Goondiwindi to The Gemfields, Clermont to the Cooper Channels, Injune to Ilbilbie, Moura to Mistake Creek and beyond for families that have held that land for generations or even just a year or two… I can tell you that certain family and partnership set ups, tax structures and decisions make a significant difference to the net asset value of a property.
My advice is to discuss with your professionals if you should engage specialists to get your ducks in a row before you look to sell.
Key question 1: have you assessed your capital gains?
The capital gains for rural properties has been highlighted with the significant increase in value of the past few years and can be significant, particularly if the property has been held for generations. It’s not uncommon for some places that were purchased for $500k to $1m twenty years ago to sell in the vicinity of $10m in today’s market… And for many sellers that I work with, a property can be held for thirty or forty years within a family before it’s brought to market.
In the first discussion, one thing I ask every seller I sit down with is this: have you gone and assessed your capital gains tax exposure on the sale of your property?
Why would that be relevant? Because capital gains tax (CGT) is going to impact your net result; the money in your hand. There are other key questions too, such as: does it help you to sell the property as walk in walk out for your own purposes? Would this opportunity assist a buyer to walk onto a productive property? I’ll discuss these later in the article. But the most pertinent question I ask farming families who are considering selling or transferring the property is around their CGT exposure. Introduced in 1985, the tax applies to any capital assets sold or transferred after that date. Owners who purchased their property before September 21, 1985 aren’t subject to capital gains tax.
“Small business concessions for CGT. The concessions for small business available are complicated and can affect sale profits by hundreds of thousands and some instances millions of dollars”.
The tax implications if you’ve held the land for fifteen years differ to those held for 365 days, and for properties held for 366 days, there are different concessions.
For example, the small business 15-year GST concession can allow you to eliminate any capital gain relating to an asset which has been operating and owned for at least 15 years if you are 55 or over and retire at the time of selling the asset. For families who haven’t held the asset that long, there is a 50% general discount on any capital gain, provided the assets have been held for 12 months, plus a further 50% active asset discount, leaving a gain of 25%. The retirement concession allows you to effectively roll some of the capital gain into a superannuation fund if you are under 55 (Lifetime limit of $500,000).
I can’t overstate the importance of developing a tax efficient structure for your farm, particularly before you commit to selling. Any farm succession plan or farm sale can be impacted by CGT and an understanding of the options available to the owner prior to the sale or transfer can be hundreds of thousands of dollars or in some instances worth millions.
Believe me, I’ve seen it all over my years selling central Queensland rural holdings. I’ve sat with sellers who had not given CGT much thought or how to manage it, until the question is raised and their accountant provides advice or seeks further expertise potentially providing them an increase in their net asset value of millions.
While some sellers are prepared, others should begin engaging with their accountant to consider the tax consequences of transferring assets years prior. It’s a reality of our tax structure that CGT can significantly erode net profits in a sale, and impact the capital available to the continuing farm business and or the retiring farmer.
Key question 2: what do you want to include in the sale?
This is one of the main considerations a seller needs to weigh up. The benefit of a ‘walk in walk out’ approach is that there is instant cashflow for the purchasers. Speaking as an agent, this general means they can generally afford to pay the premium price for the property as a working business. It also benefits some sellers by allowing a complex quick exit of the business in one transaction.
Key question 3: who is your power of attorney?
If there’s one piece of advice I would give to any rural landholder, it’s to make a decision and document your power of attorney and will, well before they may be required. Even if you’re talking succession, you need to think about the interim, if (heaven forbid) you are injured or are in some way incapacitated mentally. In this event, family members or, worse, a more public trustee is forced to get involved to look after your assets. If you choose a power of attorney, you can make clear to them your aspiration for the business and asset. In my experience, when I encourage people to talk about their power of attorney, they take a big breath in and normally walk away at that stage and the other half says, “We’ll discuss it next month.” I’m putting it on the record to say organise this sooner rather than later.
Final thoughts.
Why am I telling you this? The ultimate goal for any rural agent is to get their seller the biggest net return they can in their pocket.
“Experience. Knowledge. Skill – it’s our role to maximise the value of your rural property.…your home!
That takes planning, presentation, marketing and communication.
We are a local business with an international reach, focused on rural customers!
If you have any questions or just want to have a chat please contact me to discuss the options for selling and/or purchasing rural property.
Thanks,
Richard
M: 0400 361114 E: richard@richardbrosnan.com
