A ‘dutiable transaction’ under respective state / territory laws in Australia generally includes the transfer of real property from one party to another. Unless exempt, these transactions are liable for transfer duty.
Legislation across various jurisdictions provide duty exemptions for certain transactions including transfers of farmland between family. These exemptions offer considerable savings for intergenerational farm transfers however the provisions are complex and careful planning is required to ensure a party is not caught out with a non-exempt transaction.
Eligibility for duty exemption
In Western Australia, the Duties Act 2008 allows an exemption from transfer duty for ‘exempt family farm transactions’ defined as a transaction where:
- (a) each transferor was using farming property in the business of primary production immediately before the transaction took place; and
- (b) at the time the liability for the transaction arises, each transferee intends to continue to use the farming property in the business of primary production.
Essentially, the transfer must concern farming property (land used solely or dominantly in primary production) between family members.
Primary production includes the undertaking of the following activities for commercial purposes (whether selling the animal or produce farmed):
- the growing or rearing of plants; or
- the breeding, rearing or maintenance of living creatures; or
- the breeding or rearing of horses.
If some, but not all of the land is leased to a third party and is used solely or predominantly for the purposes of silviculture or reafforestation, then the land may be treated as being used in the business of primary production.
A family member includes a child (or remoter lineal descendant); a parent (or remoter lineal ancestor); a brother or sister; an aunt or uncle; a spouse, former spouse or de facto partner of two years; or a spouse or de facto partner of a family member listed above.
Pitfalls and traps
Transferors, transferees and family members
The objective of the exemption provisions is to encourage younger farmers to continue a family farming business without incurring transfer duty. Every transferee to hold an interest in the farming entity after the transaction must be a family member of the transferor.
As evidence of the transferor’s pending retirement, he or she should have no continuing legal interest in the farming enterprise after completion. The exemption provisions also prohibit a transferor from retaining an interest in the farm’s post-completion operations as a transferor is not considered to be a family member of himself or herself.
Although it is common for property to be held, and businesses to operate, through a legal entity such as a trust, company or partnership, certain arrangements may prevent a transaction from being eligible for the exemption.
The transferor or transferee may have operated or intend to operate the farming business individually or through one or a combination of legal entities to which the transferor or transferee was / is related. However, the following arrangements are generally ineligible for the exemption:
- land held by a transferor who is a trustee of a unit trust or discretionary trust;
- land to be held by a transferee as a trustee of a unit trust scheme;
- land to be held by a transferee as a trustee of a discretionary trust, unless every other beneficiary of that trust is a family member of the transferor and the transferor does not control the trust;
- an arrangement in which the transferee includes the transferor as a beneficiary of a trust, an unrelated company shareholder, or unrelated partner of a partnership.
Failure to document transactions
Neglecting to formalise various inter-family arrangements can have negative stamp duty effects. For example, parents of a farming property may hand over possession of the farming enterprise to their children without documenting the arrangements.
The children go on to conduct the farming enterprise for several years under their own entities. Should the parties subsequently wish to formalise transfer of the farm property, it will be difficult to establish that the parents had immediately prior to transferring the land, been carrying on the farming business, as required for the exemption.
Parties should be aware that the exemption is not available if a family farm transaction follows a transaction which occurred within the previous five years for which the exemption applied. This is the case even if the requirements for exemption would otherwise be met.
Post-transaction activities can trigger duty
Post-transaction planning is important to ensure that activities subsequent to completion of the exempt transaction do not trigger a duty liability.
For example, if a person other than a family member of the transferor becomes entitled to a share or interest as a beneficiary of a trust then liability for duty arises. Similarly, if the original transferor becomes a controlling trustee of a trust in which the property is held, this will likely be considered a ‘transfer’ with duty payable at the general rate.
The sale or transfer of a family farming enterprise involves complex financial and legal considerations. Failure to meet all conditions for an exempt family farm transaction either before or after the transaction may result in an unexpected liability for stamp duty.
When dealing with farm property, working with your taxation adviser and lawyer will help to ensure that duty issues are appropriately addressed and that the transaction is structured for optimum benefit.