Our Insights

Farmers often grapple with complex decisions about how to structure their farm businesses. Traditionally, trusts have played a central role, offering asset protection and income flexibility. However, the landscape is changing, with companies emerging as contenders for a place in farm structures and offering the potential for enduring tax benefits. Understanding these options can help you make informed choices for a prosperous future. 

 Traditional Farm Business Structures  

Traditional farm business structures typically consisted of a trust operating the day-to-day trading operations of the farm, while another trust owned the land. A trust is a popular legal structure because it provides safety for assets and allows flexibility in the distribution of income and tax minimisation. With the commercial and tax considerations offered by company structures, traditional farm business structures are being challenged. 

 Question: Do You Have a Farm Business Structure Chart?  

Have you ever made a business structure chart that shows who owns and controls the key assets of your business? If you have, it’s worth talking to your advisor about whether adding a company into your structure could be helpful. It’s important to note that if you already have a company acting as the manager (or trustee) of your trust, it’s different from having a company trading your business or owning your land. 

 Companies and Trusts – Protecting Your Assets  

Companies, like trusts, are separate legal entities and offer asset protection when it comes to separating your trading business, which carries risk, from your land-owning entities, which are passive and carry lower risk. The goal is to keep valuable farmland separate from the trading, employment, and general risks of running a business. 

 Different Tax Rules for Companies and Trusts  

Where a company differs significantly is that it pays tax on its own profits, while a trust distributes profits to the beneficiaries who pay tax on distributions at their individual tax rates.  

 Tax Benefits of Using a Company 

The tax rate for trading companies is 25%, and for non-trading companies, it’s 30%. When benchmarked against increasing average rates of tax for individuals, paying a company tax rate on your profit may provide a material tax saving. With the assistance of an advisor, you can work out if the numbers are in your favour and you’d pay less tax and, if so, the other considerations of a company structure can be worked through.  

 Other Factors to Consider  

But it’s not all about taxes. There are a range of other factors that need to be considered when thinking about whether a company structure works for your business and family. Companies have defined ownership and control structures, with directors and shareholders. You need to make sure that shares are held in the most effective and flexible way for planning, tax minimisation and succession. 

 Managing Debt and Related Payments 

Debt levels are a consideration. Introducing a company into a business structure with high debt can be problematic and lead to future tax issues. There are strict tax rules around companies making payments of behalf of, or lending to, related individuals and trusts. Conversely, there are times when a company may fit well with related party payments, for example, a land purchase to be funded by your farm trading trust. 

 Changing How You Get Paid  

Adding a company might change how you take money out of your business. Instead of taking drawings that get offset by trust distributions, you might take a combination of dividends or a salary. The primary production income averaging impact should be considered, as the nature of your income may change and some of the benefits of primary production averaging may be lost. 

 When to Talk About Farm Structure Changes  

A good time to discuss changes to your farm structure is when completing your annual profit and tax planning with your advisor pre-June. These discussions often lead to thinking about structure and average tax rates, including the advantages of companies with their 25% tax rate. If a company structure is a good fit for your business, you’ll have enough time post-seeding to get it setup and all the required things in place.  

 Companies Beyond Farms  

Companies are not only gaining their place in farm business structures but also in off-farm structures, for example investment, for many of the same reasons mentioned above. 

 Every Farm is Different  

Remember that every farm is unique, so there isn’t a one-size-fits-all approach to choosing your structure. Timing is crucial, and a company may offer an enduring tax advantage while fitting perfectly in your business structure. 

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Thorntons is an accounting and advisory practice to mid-size, family-owned businesses in Western Australia. We offer a fully integrated portfolio of financial, tax, succession, and estate planning services and have the experience to guide you through the complexity so that you can enjoy stability, peace of mind and certainty. 

 To discuss your individual business needs and find out if we might be a fit for you, please contact Thorntons at tp@thorntons.biz or call (08) 9421 1722.