Solicitor, Coolamon. NSW 2701
It is estimated by the Australian Bureau of Statistics that:
• the number of farmers with a farm production gross value of at least $20,000 is about 120,000;
• the number of family farms has declined from 190,000 in 1971 to about 126,000;
• about 88% of all farming operations are family farm operations.
Experts estimate that the survival of one in three farms is under threat due to a combination of the following factors:
(i) the downturn in grain and commodity prices
(ii) the wool situation
(iii) the increase in inputs
For the family farm unit to survive, solicitors who are working with family farming operations should be aware of the types of assistance available for farmers and the planning techniques that can ensure transfer of the family farm from one generation to another.
We need to ensure that our farmer and business clients do not adopt "the ostrich approach" by encouraging them to take advantage of expert advice that is available. Solicitors have the opportunity to play a coordinating role by providing the liaison between the clients, their accountants, bankers and farm advisers, for example, in "round table conferences".
Why planning is important
A recent survey has produced some surprising results on the discussion and planning an average farmer undertakes on the future of the family farm.
A survey on farmer planning in the Tottenham/Nyngan region of NSW and Maleny region, Queensland, was conducted by the Faculty of Agriculture and Rural Development, University of Western Sydney. It revealed that:
• 42% of parents who had married children at home on the farm had not talked to their spouse about the transfer of the farm;
• 63% of parents who had married children at home on the farm had not spoken to their returning children about transferring the farm;
• 84% had not included the daughter-in-law in any discussion of farm transfers.
A report from Monash University (Personal Investment Magazine, October 1992) identified the following:
• 75% of businesses are family businesses
• 37% of family businesses progress to the second generation
• a tiny 13% make it to the third generation
Too often, decisions in relation to the transfer of a family business, especially farms, have been determined by a lack of planning. These include:
(i) the failure to update wills to take into account who is operating the farm or business. (How often have clients died and a farm which has been operated by one child had to be sold to pay out other children who shared equally in the estate under an outdated will?);
(ii) clients having made decisions that they regret because they were not aware of the alternatives.
These highlight the need for solicitors to encourage their clients to discuss the future and plan.
Generation transfer of the family farm
If the family farm is to survive, farming families need to plan the transfer of the family farm to the next generation. The trendy terminology is "inter-generational transfers".
(A) Transfer During The Owner's Lifetime
Farmers who have a living area (in the district of Coolamon/Ganmain/Marrar, a living area which comprises 400 to 8000 hectares) must plan for the future or the situation could arise where the family farm will have to be sold if the older generation is to retire.
Retirement planning is a must, otherwise the older generation can become "asset rich and income poor" resulting in the older generation being forced to sell the family farm. This can occur when the farm is not large enough for two or more families.
Under the Department of Social Security Assets Test, an asset which is gifted is taken into account when calculating a pension for a period of 5 years from the date of the gift. At the end of the 5 year period the gift is no longer considered an asset. Therefore, a farmer who is approaching retirement age should give consideration to transferring the family farm to the next generation at least 5 years prior to retirement age. In the case of an ordinary citizen, the age at which a person is entitled to a pension is 65 years for a male and 60 for a female. For a returned serviceman the age can also be 60.
In order to give a person or persons the option to apply for a pension it is crucial to reduce their total value. Consideration should be given by the parents to transfer the farmlands subject to the Department of Social Security Guidelines so as to minimise the value of their assets. The parents can still remain in the partnership, family trust or family business and it can be structured so that they can still retain control but their assets are reduced. The main advantage of this arrangement is that during prosperous years it could be more advantageous to distribute income to the parents so as to reduce tax - this could result in the loss of the pension. In years when the farm is experiencing financial difficulties, the parents could qualify for a pension.
Farmers who have more than a living area should give consideration to the transfer of the farm to the next generation for the following reasons:
(i) to give more control to those people operating the business. (If lands are transferred during the lifetime then those persons operating the farm know that they are the owners and they are not subject to the risks of the will being changed or the will being contested);
(ii) arrangements can be made for off-the-farm investments, such as real estate, to be acquired in the parents' name with the view of the farm paying for such investments, thus providing for the parents' retirement.
The major factors to be considered include:
(i) transfer of the family farm during the lifetime of the owner;
(ii) security for the person transferring the farm. A gift could result in a person losing control over the asset. Arrangements should be made so that there is provision for a certain sum of money to be paid and/or a house provided.
The major cost of a family transfer is the stamp duty payable to the State government. The valuation of the property for stamp duty purposes has to be done by the Valuer General or a registered valuer. The valuation by a real estate agent or a Stock and Station Agent is not acceptable unless they are registered valuers.
Other costs include legal costs and registration fees.
Table 1. Stamp duty payable on land transfer
Value of Property
Rates of duty per $10
not exceeding $14,000
$1.25 with minimum of $10
$14,001 - $30,000
$175 plus $1.50 per $100 in excess of $14,000
$30,001 - $80,000
$415 plus $1.75 per $100 in excess of $30,000
$80,001 - $300,000
$1290 plus $3.50 per $100 in excess of $80,000
$300,001 - $1,000,000
$8990 plus $4.50 per $100 in excess of $300,000
$40,490 plus $5.50 per $100 in excess of $1,000,000
There are advantages in transferring lands whilst property values are low. Currently, some property values have declined by at least 50% (e.g. reduced from $200 to between $100 and $120 per hectare). Significant savings can thus be obtained as demonstrated below:
stamp duty on 400 hectares at$1250 per hectare ($500,000)
stamp duty on 400 hectares at$1000 per hectare ($400,000)
stamp duty on 400 hectares at$750 per hectare ($300,000)
stamp duty on 400 hectares at$500 per hectare ($200,000)
stamp duty on 400 hectares at$250 per hectare ($100,000)
The transfer of lands in separate parcels over a period of time relates to Stamp Duty Revenue Ruling 78. For example, if the 450 hectares were held in three different parcels, stamp duty could be further reduced by transfering the lands over a period of time in three different parcels as demonstrated below.
(a) Stamp duty on the valuation price of $1250 per hectare:
(i) 140 hectares x $1250 ($175,000) $4615
(ii) 140 hectares x $1250 ($175,000) $4615
(iii) 120 hectares x $1250 ($150,000) $3740
Total stamp duty on 400 hectares at $1250 $12,970
(b) Stamp duty on the valuation price of $750 per hectare:
(i) 140 hectares x $750 ($105,000) $2165
(ii) 140 hectares x $750 ($105,000 $2165
(iii) 120 hectares x $750 ($90,000) $1640
Total stamp duty on 400 acres at $750 $5970
Thus, stamp duty on the transfer of 400 hectares at $1250 per hectare by way of one transfer results in stamp duty of $17,990. By three separate transfers the stamp duty is reduced to $12,970.
Likewise, stamp duty on the transfer of 400 hectares at $750 per hectare by way of one transfer results in stamp duty of $8990. By three separate transfers the stamp duty reduces to $5970.
Limitations on the splitting of contracts
The Stamp Duties Act (Section 41 (3A) and Section 41 (3B) sets out that in certain circumstances separate contracts will be deemed to be one contract subject to the following:
(a) if there is more than one agreement, executed in relation to one transaction, which relates to the whole of the property, then the transaction could be deemed to be one contract. For example, if the one vendor had three separate blocks of land and entered into three separate contracts with the one purchaser, this could be deemed one contract;
(b) if the same parties enter into a number of agreements in relation to parcels of land owned by the vendor during a twelve month period, such transactions can be assessed as one transaction.
Transactions are not classed as the same transactions if there are different parties. For example, one vendor could transfer three separate parcels of land and the transfers be assessed as separate transfers if one block was transferred to the husband, one block to the wife and the third block jointly to the husband and the wife.
Therefore, if two separate contracts (not withstanding that together they relate to the whole of the property) show two separate purchasers for separate interests they should be separately assessed. If they are made interdependent, however, one transaction may be construed. This, at least, is the viewpoint of some assessors at the Stamp Office although there appears to be no particular ruling to substantiate this claim (Revenue Ruling SD78).
Purchasing land as tenants in common
There is a grey area in the Stamp Duties Act which allows persons purchasing lands as tenants in common to enter into separate contracts on the following conditions:
(a) the contracts cannot be interdependent
(a) the contracts cannot include growing crops
For example, if farmlands are sold to two persons as Tenants in Common in equal shares, the stamp duty on $300,000 is $8990. If there were two separate contracts, as follows:
• an undivided one-half share to one of the joint purchasers of $150,000 (stamp duty - $3740); and
• an undivided one-half share to one of the joint purchasers of $150,000 (stamp duty - $3740),
the total duty would be $7480.
Penalty stamp duty
If stamp duty is not paid within two months then the following penalty applies:
• 20% penalty if not paid within two to three months of the date of the agreement;
• 25% penalty if not paid within three to four months of the date of the agreement;
• 100% penalty if not paid within four months of the date of the agreement.
Under Section 44 of the Stamp Duties Act, stamp duty is payable on oral contracts in relation to the transfer of assets, including any interest in a business, partnership, goodwill.
Stamp duty is payable on the transfer of an interest in a partnership. For example, if the parents owned a half share of a partnership and a daughter a half share, then stamp duty would be payable on the net value of a half share if the parents transfer their half share to someone else. It is important that the transfer take place prior to the dissolution of the partnership, otherwise stamp duty could be paid on the total value of the partnership assets.
Stamp duty on mortgages
The stamp duty payable on a mortgage comprises:
• $5.00 on the first $16,000
• 40 cents per $100 on the balance
Exemptions from loans refinanced by primary producers
The Stamp Duties (Amendment) Act 1988 had inserted a new section 84CAA into the Stamp Duties Act 1920. The effect of this section is to exempt from loan security duty the refinancing of loans where the land:
(a) is used for primary production or commercial fishing;
(b) is substantially the same as contained in the earlier security.
This however is only to the extent where the new loan is used to repay the balance outstanding under the earlier security. From April 23, 1991, this exemption was extended to include cases where, in the course of refinancing, additional land or other assets are included in the replacement or additional loan security.
For example, if $100,000 was advanced under a loan security and only $50,000 was needed to pay out an existing loan security, the "new" loan security would be exempt with respect to the first $50,000 advanced only; duty at the rate of 40 cents per $100 would be payable on the remainder.
Stamp duty payable on shares of a private company which owns lands
Where 80% of the assets of a private company or private unit trust is land (Section 99E) and the value of the land is at least $1 million, the Act sets out that stamp duty is payable at conveyance rates in relation to the acquisition of shares in a private unit trust scheme.
Transfer of shares or transfer of units in a unit trust
The stamp duty payable on a transfer of shares and a transfer of units in a unit trust scheme is 6 cents per $10.00 (or part thereof) on the value of the shares/units being transferred or the consideration being paid for same, whichever is the greater.
Stamp duty on leases
Stamp duty on leases is 35 cents per $100 rental payable for the full term of the lease. There are also provisions governing the stamp duty liability when leases are varied.
The first home owners stamp duty scheme
This scheme allows stamp duty to be paid off over five years or, if paid within two months of the date of the contract, a 30% discount is available. This scheme is available to farmers subject to:
• principal place of residence being located on the land; and
• value of the land and residence being below $145,000.
Capital gains tax
When purchasing a property where there are improvements, consideration should be given to the apportionment of the purchase price between the following:
(i) the value of the house; (If the house is to be the principal place of residence, there could be an advantage of placing a low valuation on the house so that when the property is sold and the value of the property increases then part of the capital gain could be apportioned to improvements to the house);
(ii) the value of any improvements;
(iii) the value of the land.
Goods, wares and merchandise
Section 43(A) and 43(B) provide for exemptions from stamp duty for livestock and growing crops defined as "fructus industrialis", including cereal crops and legume crops.
For example, if a farm was sold for $200,000 and the value of the growing crops was $50,000, stamp duty would only be payable on $150,000. However the stamp duty and capital gains tax for the transfer must be considered. It is no use saving stamp duty by having the property value reduced when the lower value will be the cost base for capital gains tax purposes. If the land is sold later at a significantly higher price then the capital gains tax bill could far exceed the savings on stamp duty.
Different legal entities for land purchases
Consideration should be given to weighing up the advantages and disadvantages of purchasing lands under either of the following entities:
• as an individual or individuals as Joint Tenants or Tenants in Common;
• as a Family Trust with individual trustees or a corporate trustee. Some accountants are recommending family trusts as an ideal vehicle to purchase lands on the basis of the following:
(a) control by the older generation but no personal ownership
(b) control can pass from one generation to the next by changing the trustee
(c) complete flexibility in assets/income distribution
(d) ideal vehicle for tax planning and for future asset acquisitions;
• a company for a unit trust with a trustee company;
• a land holding company.
The client, solicitor, accountant and financial advisers should take into account the following:
(i) the capital gains tax implications;
(ii) fringe benefits and other taxation implications;
(iii) whether the lands are freehold or leasehold lands;
(iv) the flexibility of ownership and the ability to deal with the assets under wills;
(v) the intra-relationship between the legal entity which owns the lands and the legal entity which operates the business.
Joint tenants or tenants in common
Where two or more people buy a property and hold it as joint tenants, they are entitled to possession of the whole of the premises. When one dies, the survivor(s) automatically owns the deceased's share no matter what his or her will says.
When two or more people buy as Tenants in Common there is no automatic right of survivorship. This means that an owner of a certain share as Tenant in Common can leave his or her share to others in the will. For estate planning purposes therefore, it is often an advantage to own lands as Tenants in Common.
If joint owners hold as Joint Tenants and then wish to hold as Tenants in Common then a transfer can be registered on the basis that there will be nominal stamp duty payable.
(B) Transfer Of Farm Lands Under A Will
As there is only nominal stamp duty and no death duty payable on the Transfer of Assets under a will this can be a most cost-effective means of transferring assets between generations.
The male is often the major landholder. As women are outliving men by about 7 years, a farmer must regularly update his/her will to take into account changing circumstances. Often farmers make a will when they first marry providing for the farm to go initially to the surviving spouse.
As the children become more involved in the farm, consideration should be given to whether the farmlands should be left to the person working the farm, subject to adequate provisions for housing, income or investments for the surviving spouse.
Where the will is not updated regularly, the situation could arise where a farmer at the age of 65 could die leaving the farm to the spouse who would then be asset rich and income poor. Thus the son and/or daughter or family member working the farm could be left in a situation whereby the only way the surviving spouse could survive would be through the sale of the farm. This problem can be avoided in the will providing for the farm to go to the person or persons working the farm subject to certain conditions such as:
• the spouse having the right to occupy a house on the farm or the person working the farm providing alternative accommodation by way of a house or other accommodation for the spouse;
• a set sum of money or other forms of investments also being available for the spouse.
This could result in the surviving spouse qualifying for a pension and the family member operating the farm being able to continue the farming operation.
Wills - not everyone can be treated equally
If a family farm is to continue operation after the death of the owner or the person or persons working the farm, then all family members cannot be treated equally. Where a farmer leaves the whole of his/her farmlands equally to his/her children this could result in the farm having to be sold.
Many problems can be avoided if all family members are consulted in sharing the will-making process. Once a draft of a will has been prepared, arrangements need to be made for a family meeting to discuss it and/or a copy provided to all family members. This gives all family members an opportunity to have their say and minimises the chance of future friction. It also makes it more difficult for those other family members to contest the will if they have been involved in the discussions leading up to the making of the will and have been given an opportunity to express their wishes.
The advantage of the family meeting is that arrangements can be made for those members who are not working the farm to receive an agreed form of assistance during the lifetime of the farmer such as assistance in the purchase of a home or for education.
As an exemple recently, the parents wished to treat all their sons and daughters equally. At a family meeting, these non-farming members indicated that this would be unfair as those farming members would not be able to continue. As a result, arrangements were made for the non-farming members to receive some form of assistance towards a deposit on a house. An agreement was reached that the farmlands and business were to be left to the farming members.
While this arrangement does not prevent the other family members from lodging an application to contest the will under the Family Provisions Act, it does minimise the likelihood and success of such action.
Costs in relation to wills
Solicitors should educate their clients and their local communities about the importance and advantages of having a will prepared by their local solicitor - in dealing with the Public Trustee, clients can be "penny wise and pound foolish".
It should be noted that although the Public Trustee will make a will for no charge, there are certain disadvantages:
(i) the Public Trustee is appointed Executor;
(ii) the estate is handled through the nearest Court House and all correspondence has to be directed to the Public Trustee office in Sydney. This can be time consuming and inconvenient;
(iii) the Public Trustee charges the following to administer an estate:
• 4% of the gross value of the estate up to $100,000 ($4000)
• 3% of the next $100,000 ($3000)
• 2% of the next $100,000 ($2000)
• 1% of the next $100,000 ($1000);
• the local court staff in general have very limited knowledge of estate and no personal knowledge of the affairs of the deceased.
members of the public often are not aware of the implications of a Public Trustee will.
Family trust and partnership interests
Prior to preparing a will for a farmer and/or business person a solicitor should check the type of business structure and liaise with the client's accountant to ascertain:
• who owns the plant, equipment and livestock. If a Family Trust owns the plant, equipment and livestock then the farmer cannot leave such items in his/her will;
• if a Family Trust is the trading entity. The solicitor should check who the Trustee is and who is the Appointor. The will should deal with such issues as a Transfer of the Trustee's or Appointor's powers. This can be crucial for estate planning;
• the balance sheets of the trading entity to take into account any debts owed by or to the person making the will.
A situation could arise where a person leaves an interest in an entity believing it to be an asset but which could be a liability, depending upon the capital and loan accounts of the person making the will. In some cases accountants have structured accounting records for trading entities so that there are debts owing by or owing to the person making the will about which the person making the will is unaware. Undoubtedly, solicitors have received critical comments from accountants that wills do not reflect the nature of the business structure.
While it is important to liaise with a client's accountant, it should be emphasised that accountants should refer clients to solicitors when a change of business structure occurs.
Will drafting and the assets test
Under the assets test the combined assets of a married couple are taken into account when calculating the total value of the assets. Often either the husband or the wife own the majority of the assets. If a couple is disqualified from obtaining a pension under the assets test when the majority of assets are owned by one spouse, then that spouse could give consideration to transferring certain assets direct to other family members. This is because assets transferred under the terms of a will to other family members are not taken into account when calculating the asset value of the surviving spouse. For example, if the value of the farm owned by the husband exceeds the assets test threshold and disqualifies the couple from obtaining a pension and a son of the couple is working the farm, the owner could leave in his or her will the farm to that son thus enabling the spouse to qualify for a pension.
Dying without a will
A person who dies without a will, at law dies intestate. The Wills Probate and Administration Act sets out how that person's estate is distributed as follows:
• if a person dies leaving a spouse or a de facto spouse with no children then the whole estate passes to the surviving spouse or de facto;
• if there is a spouse or a de facto spouse and children, the first $100,000 of the estate passes to the spouse or de facto, together with the household effects. The balance is divided so that the spouse receives a half share and the other half share is shared between the children;
• if no spouse or de facto spouse survives then the estate is divided equally between the children;
• where there is no spouse nor children, then the estate passes to the parents of the deceased, in equal shares;
• thereafter the Act provides the order of classes as: brother and sisters or their children; half-brothers and sisters or their children; grandparents; uncles and aunts; and then uncles and aunts resulting from the marriage of the deceased grandparents;
If there are no relatives then the estate passes to the State of New South Wales.
The major disadvantages of dying without a will are:
• that the law sets out how the assets are to be divided. If you die without a will and leave a wife and children and your assets exceed $100,000, then the surviving partner could be restricted by the fact that half the assets over $100,000 go to the children. Often it is more practical to leave the whole of the estate to your partner on the basis that they will look after the best interests of the children;
• that it can be more costly to finalise the estate of a person who dies without a will, as there is more paperwork and many more formalities;
• that you do not appoint your administrator to handle the estate. Under a will you can appoint your executor.
Any person over the age of 18 years of age should give consideration to making a will.
What is a will?
A will is a legal document which sets out how a person's estate (assets) is to be divided on death. There are certain requirements for a will to be enforceable and it is an advantage to arrange for a solicitor to prepare, and to supervise the execution of the will.
The key parts of a will are that:
• it must be in writing and the person must be over the age of 18 for it to be valid;
• it must be signed at the bottom of each page by the person making the will (any amendments should be initialised);
• it should be witnessed by two independent witnesses who observed the person making the will sign the will;
• it should deal with all assets of the person making the will and it is recommended that there be a residuary clause which sets out where the balance of any assets are to go;
• it sets out that it is binding until another will is made;
• it sets out who the Executor or the Executors will be. The Executor or the Executors are the people who control the collection of the estate assets and the distribution of the assets in accordance with the will.
• The Executor's role ends when the assets have been distributed to the beneficiaries but where children are involved, the Executor or Executors are often appointed trustees. Often the assets cannot be distributed until the children attain the age of majority (18 years) and therefore the trustee role is to control the assets until they can be finally distributed;
• it sets out how the assets are to be divided.
If assets are being left to the children, they become entitled to the assets when they attain the age of majority (18 years) or at an age specified in the will.
The will can also include:
• the appointment of guardians for the children;
• directions regarding burial;
• directions that personal assets are to be divided in accordance with any list that may be prepared by the deceased.
When is a will cancelled?
A will is cancelled:
• when a new will is made;
• upon the marriage or remarriage of a person;
• upon the divorce of a person.
Changing a will
A will should be changed when a person's circumstances change. Other circumstances include where special arrangements need to be made for the benefit of children with disabilities and other such circumstances.
Probate in the past was used to describe death duties. There are no death duties payable on any estate in New South Wales.
In certain circumstances a grant of probate has to be obtained from the Supreme Court of NSW. The grant of probate is the proving of the will, and the probate document authorises the transfer of assets in accordance with the terms of the will.
A grant of probate has to be obtained where real estate is involved (except in the case where real estate is held as joint tenants with another person) and where assets such as investments are in the sole name of the deceased and exceed $10,000.
Often where the only assets are investments a solicitor can arrange for the assets to be released without a grant of probate depending upon the size of the investment and the beneficiary.
Power of attorney
A power of attorney is a document which appoints and authorises a person (called the attorney) to act on behalf of the person granting the power of attorney. The power of attorney must be registered in the Registrar General's office in Sydney if the attorney is to sign documents involving land transactions.
If a power of attorney is witnessed by a solicitor or a court house officer, then the power of attorney is valid, even if the person is mentally ill or unconscious.
Under a power of attorney document, the power of the attorney can be limited by specifying certain conditions such as whether:
• the attorney can only act in relation to certain transactions;
• the attorney can only act for a specified period of time.
People can also contact their banks or the Department of Social Security for authority forms to be signed, whereby authority can be given to operate their bank account or in relation to the Department of Social Security to collect their pension.
The power of attorney can be revoked by the principal (the person executing the power of attorney) at any time.
When making a will, people should consider a power of attorney.
The Australian Banking Industry Ombudsman (ABIO) offers some assistance to those who are unable to reach accommodation with a bank for amounts under $100,000. The ABIO offers FREE help to individual customers unable to resolve a complaint with their bank. The scheme is funded by the participating banks but operates independently of them. That independence is ensured by the establishment of the Banking Industry Ombudsman Council, consisting of equal numbers of consumer and banking representatives. The Council is chaired by Sir Ninian Stephen.
The Ombudsman can help for complaints:
• arising on or after May 10, 1989;
• involving a sum greater than $100,000; and
• regarding maladministration by the bank.
• examines the complaint to obtain a resolution. To this end, he may bring the person and the bank together to talk about it, either by teleconference or in person;
• works according to the law, good banking practice and what is fair in all circumstances. He ultimately can award up to $100,000 damages against a bank for actual loss incurred on any one matter.
The bank is bound by the Ombudsman's determination but the customer is not bound by his final determination. The complaint can be taken to court, or through any other process that may lead to its resolution. If, however, the Ombudsman's determination is accepted, the right to pursue the complaint in any other forum is waived.
The procedures to be followed are:
• in the first instance to try and resolve the complaint with the local bank, if necessary with the bank manager;
• if unsuccessful, a form available at the local bank should be completed. This form becomes an envelope which is pre-addressed to the bank's complaint officer at head office;
• where a response is not received from the bank within four weeks of posting the form, or where the response is not satisfactory the Banking Ombudsman can be contacted by writing to:
PO Box 199
Carlton. Vic. 3053
Telephone: 03.3491999 or toll free on 008.337444
For complaints regarding insurance or superannuation, the appropriate addresses are:
Insurance and Superannuation Commission
GPO Box 7059
Sydney. NSW 2001
Life Insurance Federation of Australia
Enquiries and Complaints Section
31 Queen Street
Melbourne. Vic. 3000
Telephone: 03.6295751 or toll free on 008.335405