Can my SMSF Buy a Farm

Can My SMSF Buy a Farm Using Super Cash or Borrowings?

Can My SMSF Buy a FarmYes a SMSF can buy a farm and lease it back to the member or other related party. Yes it may be possible to purchase the farm with existing cash or borrowings under a limited recourse borrowing arrangement (LRBA).

Often farmland is considered an excellent investment for capital growth purposes with a steady income stream.

It is complicated and should only be done in consultation with your SMSF specialist or Licensed Financial Planner.

The crucial questions to be aware of are:

  • Will the investment enable the SMSF to provide sufficient benefits to its members for their retirement purposes
  • The impact of providing retirement benefits when the SMSF holds a lumpy asset
  • The impact of the proposed (not yet legislated at the time of writing this article) Division 296 tax – tax on member benefits over $3million
  • Think about the exit before you begin
  • Understand the restrictions and risks of using an SMSF to hold the family farm

Considerations When Buying a Farm with My SMSF 

The purchase of a fam must be allowed in the SMSF deed, and the rural investment property should be included in the investment strategy and investment objectives of the SMSF. The decision to purchase a farm using SMSF cash or a SMSF loan must be documented and transparent.  This is generally done using trustee minutes and attaching any research or advice received.

Who are you buying the farm from? 

Consider the following when purchasing the farm:

  • Market valuation – when purchasing from a member it is best to obtain a formal valuation from a qualified valuer specialising in rural properties. 
  • A farm acquired from a member must meet the definition of business real property. 
  • Separate the land and items attached to the land vs equipment which is used in a primary production business.
  • Liquidity and diversification of the fund’s portfolio.
  • Does the farm contain a dwelling which is a private residence? If so, what is the area of land it occupies including use of the land for private and domestic use i.e. vegetable garden for personal use, play area for the kids and flower gardens?
  • Does the SMSF have sufficient retirement savings to purchase the farm, or does it need to borrow using a LRBA?

Who will be leasing the farming property?

Consider the following when preparing a lease agreement for the farm:

  • A member or related entity must be carrying on a business of primary production in order to lease the farm from the SMSF.
  • Market valuation – when leasing the property used in the farming business operations to a member or other related party it is best, similar to purchasing a property from a member, to obtain a formal valuation from a qualified valuer specialising in rural properties. 
  • Market valuation – when leasing the private residence to the member or related party obtain a formal valuation similar to the point above. 
  • Formal lease agreement is required for the use of the farmland and the private residence. The lease agreement must include terms and conditions which are common to the industry. Farming leases typically deviate from the more conventional suburban or commercial properties.  

General Restrictions and Risks imposed by the Superannuation Laws and Regulations

  • Arms length – all transactions in relation to the purchase, holding and selling of the SMSF property must be on an arms length basis which means the purchase price cannot be inflated simply because the SMSF is acquiring the property from a member or related party. Alternatively, the purchase cannot be discounted.  The property value on acquisition must be what a third unrelated party would pay for the property as if it was on the market to the public.
  • Audit – a SMSF is audited annually, and appropriate records made available to the auditor to explain the transactions including lease agreement, annual market valuation of the property, market valuation of the rent.
  • In-house assets – a farm must meet the definition of business real property if acquiring the farm from a member. 
  • No Charge Over the Land – unable to use the farm as security, except if the fund has entered into a LRBA.
  • Rent is required to be paid on time and in accordance with the lease agreement regardless if there is drought, flood or fires.
  • All expenses in relation to the land should be paid from the fund’s cash, except for repairs and maintenance which could be paid from borrowings in certain circumstances. The farmer cannot simply provide labour or other services even though it may be beneficial to the fund (refer to discussions about NALE below at “Who does the Repairs and Property Improvements”. 

Advantages vs Disadvantages for a SMSF to Include a Farm Investment in their Portfolio

When you use super to buy land used in a primary production business there are a number of advantages including:

  • Opportunities to plan retirement income strategy
  • Estate planning 
  • Creditor Protection
  • Succession
  • Property Management
  • Tax savings being 15% on the income and capital gains on disposal which can reduce down to nil when the members start retirement pensions.

Of course there are also disadvantages which include:

  • Liquidity can become an issue as the valuation of the farming land generally increase over the long-term forcing up the pension payable as the SMSF must pay the pension based on a percentage of the member’s pension balance valued at 30 June in the previous year. The percentage increases to a maximum of 14% when the member reaches 95.
  • Payment of a death benefit may force the sale of the farm in some situations
  • The SMSF may be asset rich but cash poor.
  • Separation of the farming land vs the farming operation
  • SMSF lenders are shrinking in the marketplace 

Primary Production business Vs a Hobby

An SMSF can acquire a farm from a member or the member’s related trust, or company provided it meets the definition of business real property. 

The term ‘business real property’ refers to land and buildings used wholly and exclusively in a business.  A farm which contains a private residence or house used for private or domestic purposes does not preclude the property from being classified as business real property.  However, the residence and related grounds cannot be more than 2 hectares (about 5 acres) in land area. Refer to the Australian Tax Office Website for further information.

Business real property | Australian Taxation Office (ato.gov.au)

A property used for primary production can meet the definition of business real property, but it excludes land used for hobby farming. 

Example – Fred owns a 20-acre property, and he owns a dozen chickens. He sells the eggs which are in excess of his own personal use to his neighbours and friends. Fred’s activity is that of a hobby farmer and any money he makes from selling the eggs are not included as income in his tax return.  The land cannot be purchased by his SMSF.

Fred might have a different outcome if instead he undertook research about what type of chicken business to pursue, how best to look after and market the chickens. He undertook a business plan working out what equipment he needed, how many chickens he needed to make a profit, how to purchase baby chicks to grow them and if required, he would source additional finance from the bank to carry out his plan. He initially decided to purchase 400 chicks to raise and sell for meat. He undertook changes to the property to accommodate the chickens and store the equipment required to pursue his business.

Under this scenario Fred is very likely to be carrying on a primary production business based on the scale of activities undertaken, his intention to make a profit which was based on research that he did, and he established the business in a businesslike manner.

Understand the Sole Purpose Test with Rural Land?

A question often posed is can I use my super to buy the family farm and still live in the farmhouse?

Yes you can, subject to the discussion points in this article, but the most important issue is to ensure the fund can pass the sole purpose test. Your SMSF and the farm (including the farmhouse) must be purchased and maintained for the sole purpose of providing retirement benefits to members, including their beneficiaries if the member dies before retirement.

Example – Paul is a farmer but setbacks due to fires and then floods have caused severe cashflow problems. He wants to unlock the cash built up in his SMSF by selling the farm to his SMSF. He does not get a formal valuation and decides it is worth $1.5 million. Funnily enough he owed the bank $1.5 million. On audit the market value of the property was determined to be $1.9 million. The SMSF has breached the sole purpose test. The sole purpose of the fund acquiring the farm was to payout the loan and not to acquire an asset to benefit the members retirement. It may be that the acquisition also benefits the members but it is not the sole purpose of acquiring the asset.

Fred might have a different outcome if instead he undertook research about what type of chicken business to pursue, how best to look after and market the chickens. He undertook a business plan working out what equipment he needed, how many chickens he needed to make a profit, how to purchase baby chicks to grow them and if required, he would source additional finance from the bank to carry out his plan. He initially decided to purchase 400 chicks to raise and sell for meat. He undertook changes to the property to accommodate the chickens and store the equipment required to pursue his business.

Under this scenario Fred is very likely to be carrying on a primary production business based on the scale of activities undertaken, his intention to make a profit which was based on research that he did, and he established the business in a businesslike manner.

What can the SMSF Own vs What the Farmer can Own?

It is crucial to understand who owns what.

The self managed super fund owns the land and what is attached to the land.  A rule of thumb is that if the item can be removed from the land without damaging the item or the land it will be part of the land.

In the examples below grape vines are attached to the land.  The vines are kept for a long period of time and it would significantly impact the land if they were removed and thus, they are considered to form part of the farming land owned by the SMSF.  It must be noted that whilst the grape vines are attached to the land, the grape crop is owned by the farmer and harvested annually and is not considered to be attached to the land. 

Examples – As per ATO rulings

Attached to the land – can be owned by a SMSF

 

  • Trees
  • Grape Vines
  • Dam
  • Windmill Pump
  • Large Hay Shed
  • Fences – generally the lease would make the farmer responsible to maintain the fences
  • Farmhouse, and including surrounding area up to two hectares (approximately 5 acres), used for private or domestic purposes
  • Renovations to the farmhouse but not items like stoves, refrigerators and furniture

Not attached to the land – can be owned by the farmer but not the SMSF

  • Crops such as tomatoes, wheat, hay, rice etc.
  • Water license
  • Irrigation equipment unless it is fixed to the land such as underground pipes
  • Silo which is able to be easily removed as it is not secured to the land 
  • Equipment such as tractors, slasher, excavator or trucks

My Super Fund’s Investment Strategy 

A SMSF needs an investment strategy. The fund’s investment objectives should be in writing and be reviewed regularly. When a SMSF buy property, it should be included in the investment strategy to evidence why the trustees believe it will meet the investment objectives of the fund and benefit the members retirement.  

Borrowing to Purchase Primary Production Land within your SMSF

The SMSF can borrow to buy the farm, which is a business property, using a Limited Recourse Borrowing Arrangement (LRBA). The following should be considered:

  • Reliance on rental income from the farm lease given the volatility of farming income
  • Reliance on member contributions to service the loan if a member dies or becomes incapacitated
  • Lenders offering commercial smsf loans are reducing
  • Related party loan 

Generally, a LRBA limits significant changes to the property which could potentially create a different asset.  It is accepted that building a house on vacant land would change the land into a different asset which means your SMSF would fail the prohibition on borrowings.  Interestingly the ATO’s view on a cattle property with no buildings on it continues to be a cattle property even though a private residence or a cattle shed is built on the land.  The ATO consider that this does not change the underlying nature of the property and does not contravene the borrowing provisions.  However, it is noted that the SMSF cannot borrow to fund the additions.  It would have to be funded from existing cash in the fund.

The LRBA requires that each loan is for a single acquirable asset.   A farm can have several titles and thus each title is a considered to be a single acquirable asset.  If there was a substantial building which straddled titles then the single acquirable asset can include more than one title.  It is possible that multiple LRBAs may be required to transfer a farm into a SMSF.

Living On the Rural Property

Leasing the property to a related party which is also their private residence is allowed provided it does not exceed 2 hectares. Even if the private residence is leased to an unrelated party, it does not exclude the property from being business real property.

The lease of the private residence is required to be recognised in the leasing arrangement for the property. The rent is required to be at market value. If no rent is charged it potentially triggers the arm length provisions and possibly providing financial assistance to a member.  On the other if the rent is higher than market value it could be construed as non-arms  length income (NALI) and the rent and the future capital gain on disposal can be taxed at 45%.  A very difficult tightrope. It is very important to obtain an independent market valuation of the rent to ensure the lease reflects this and the rent is collected in accordance with the lease.

Who Does the Repairs & Property Improvements?

 Farmers are very stoic people who are very practical and handy. They will fix things and make improvements to fencing, irrigation equipment and anything else on the farm that needs it. 

However, it must be clear how they decide to pay for and carry out repairs and improvements to SMSF property.

SMSFs must only use the fund’s cash to pay for repairs and capital improvements made to the farm except when a SMSF has entered into a LRBA which allows drawdowns of equity to be used for repairs and maintenance purposes. Superannuation fund cash cannot be used to repair or maintain the equipment used to run the farming business.  

A member of a SMSF who also lives on the farm owned by their SMSF is in a unique position of risking the non-arms length expense (NALE) rules which are governed by the Australian Taxation Laws and Regulations. NALE applies to expenses which are either too low when compared to commercial rates or no remuneration is paid for services or materials as the parties are not dealing with each other on an arms length basis.  NALE can result in the rental income and the capital gain from the future disposal of the farm being taxed at 45%.

Example – The farmer decides to build a new fence to improve the value of the property. The SMSF can spend money on capital improvements to the fence so that is ok. To save money Farmer Jo decides to build it himself. The SMSF is required to pay Farmer Jo for services he provides as the cost of that service would not be insignificant. The amount must be at a commercial rate to avoid NALE.

The catch here is that farmer Jo is unable to receive remuneration for providing a service unless he provides those services to the public and has an appropriate qualification. Most farmers would not be providing fencing services to the public. This would be problematic but avoidable if the SMSF paid an independent fencing contractor to do the work.

Exiting the Farm

Farming properties are part of generational legacies and there is a strong desire to pass on the farm to sons and daughters. 

Think about the impact on cashflow in these situations when dealing with a large single asset that cannot be easily or partially liquidated to generate funds as needed.

  • Paying pensions – requirements to pay pension minimums is more difficult as the member ages as the amount of pension increases to a maximum of 14% when the member reaches 95 and relying on rental income from farming activities becomes more problematic.
  • Death of a member in relation to the compulsory cashing rules means the members benefit must be paid out possibly forcing the sale of the farm.
  • Options to payout a death benefit can include a death benefit pension but eventually a lump sum payment will be inevitable.
  • The Transfer balance cap limits the amount a member can have in pension mode which means when a spouse passes away the amount that can be retained in super will depend on the surviving spouse’s ability to rollback their existing pension and take on the death benefit as either a reversionary pension or a new pension.
  • New members could possibly be added to the fund with the possibility of fresh capital which could be used to payout the death benefit and retain the farm as a fund asset.
  • Selling the farm to another SMSF owned by the children who are the next generation.
  • Stamp duty, GST and capital gains tax implications of transferring the farm to a beneficiary or to another family member who pays a market value for the farm.

Getting strategic planning advice from your SMSF specialist or qualified financial adviser is essential when it comes to transferring the farm to the next generation or avoiding a forced sale during important life events. 

Conclusion: Is Buying a Farm with Your Self-Managed Super Fund Right for You?

Possibly. 

The primary reason for acquiring a farm should be to support the retirement of members or beneficiaries in case the member passes away before retiring, rather than addressing liquidity concerns that frequently affect farming families. It is essential to have a comprehensive knowledge of SMSF laws and rules, and to seek guidance from a licensed financial adviser or SMSF specialist before opting to utilise superannuation funds for purchasing a family farm.

Acquiring farmland and then leasing it to a family member or related party could prove to be advantageous. Including the purchase of the family farm in the SMSF’s investment goals should be done with thorough evaluation of the risks and benefits.

We note the impact of the proposed (not yet legislated at the time of writing this article) Division 296 tax – tax on member benefits over $3million – has not been addressed in this article.  The draft legislation will only affect a member who has more than $3million in super benefits.  This means that a typical fund, with mum & dad being the only members, could potentially have a farm worth close to $6 million before a member is impacted.  Of course, if the children are included as members of the SMSF the farm could potentially be worth a lot more.  This will be addressed in future articles.

Besides cash flow, one of the key concerns for a self-managed super fund (SMSF) that includes a family farm in its investment portfolio is ensuring that there is a clear distinction between owning the farm and managing its operations.

Do you need help with understanding the issues with your SMSF purchasing a farm?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF and Farms please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you need help with understanding the issues with your SMSF purchasing a farm?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and Farms please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)