Questions re purchase of family farm

[cedben]

Hi all,

My name is Ben. This is my first post having been following this forum for a considerable time due to my interest in property.

I am now in a situation whereby I would appreciate any ideas or advice that any members of this forum may wish to give.

My situation is as follows: My wife and I have a house valued at $250,000 which we have borrowed $200,000 against as security for a business.

My wife's parents have a farm with a egg business on it which they wish to sell to retire. The farm (land component only) is worth approx $468,000. The seperate business (egg production) nets approx $70,000 per year.

I am considering buying the farm on a WIWO basis for $200,000 plus the transfer of my house to my wife's parents.

This will keep me busy as it means I will be running a farm / egg business as well as my current business, however I strive on hard work so look forward to the challenge (I have effectively been doing this for the last 5 years anyway due to my inlaws health)

My wife's parents do not have a lot of superanuation and their other assets (cash and shares) are worth approx $200,000.

The initial part of the deal sees us trying to determine the best way to structure the transfers and maximising the parents income (both are eligible for the pension in February next year) will also making the deal workable for my wife and myself.

Initially the deal was going to be me pay the $200,000 plus transfer ownership of our house. However I am now not sure if this is the best way to do this or not.

Maybe we are better to hold the house in our name as an IP and let the parents live there at minimum rent so that we can claim expenses against it with a legal document clarifying that we can not dispose of the property during their lifetime/required period of use.

However if we did this could we still show the purchase of the farm for $200,000 for tax purposes or would we have to show it at say $450,000.

Also what would be the best use of the $200,000 by the parents to maximise their return from it and reduce their tax payable, would it be to put it into superanuation?

I have a meeting my my accountant and also my wife's parents accountant next week to discuss some of these matters and will be going along with some of my own ideas so any suggestions/advice would be appreciated.

Sorry about the long post, however as I am sure you will all appreciate this is a fairly big step for all of us so need to make sure I get it right and there are obviously some very smart and expereinced people using this forum so thought it well worth posting this request.

Many thanks

Ben

 

[tubs]

Hi Ben

Its well over my head, but you must get a fair rent from your in-laws if you rent it back to them, otherwise the ATO see it as if you'll be claiming a bigger deduction than you should have been if you'd rented it at a fair price.

Of course, you can find out what an agent would list it at (and you'd want as low a figure as possible) then take some off that because you'd not be paying commissions, your in-laws would not be moving (so take some more off because vacancy wont cost you) and they'll be looking after the house, doing maintenance etc hence saving you money (so take some more off to compensate for this).

Tubs

 

[Apocalypse]

Hi Ben

From your inlaws point of view, there are some pretty generous retirement concessions available nowadays with regards to sellling of businesses/farms (primary production stuff). This really needs an accountant or financial advisor whom specialises in this area.

As for your angle I don't know how easy it would be to get all your finance sorted since you've already got a chunk tied up against one business and getting finance on farms/etc may be a bit difficult...maybe a good mortgage broker will help you?

 

[cedben]

Family farm purchase

Thanks for the replies.

I have a meeting with my accountant on Thursday after a lengthy phone converstation and a number of emails yesterday. He has also had some discussion with an affiliated financial planner regarding the inlaws retirement. I am in the process of preparing information for my mortgage broker and have had initial discussions with him. At this stage finance does not appear to be a problem.

Will see what happens by the end of the week.

Ben

 

[Mry]

The parents should be looking at the Small Business Retirement Exemption, where they can get up to $500k (each) in capital gains tax free. The land upon which the business dwells, and the business itself, are all included. I assume they are over 55? If over 55, they can keep the $$! If under, they have to roll the proceeds into a super fund. The higher the sale value of the land the better, since they are paying no tax on the sale proceeds and you will be able to claim it as a cost base later on (of course, the sale must be at market value since that is what the ATO will be looking at).

As for the sale of your IP, well, it would be better to hold onto it from your perspective as it would save you paying capital gains tax on sale and your parents paying stamp duty on going in. Plus you still get to keep it as an investment. However, the downside is that you may have to give more money to your parents in lieu of the house itself, and land tax.

 

[Apocalypse]

Mry, I read it as Ben's "house" being his PPOR. In which case do you think he may be better 'selling' it to his inlaws, as he will get the proceeds CGT free and the inlaws get a PPOR which would improve their position wrt pension qualification?

 

[Mry]

Yes, Apocalypse, a second read through and it seems you are correct. In that case, the cost in swapping each property will just be the stamp duty.