‘Lumpy, illiquid assets’ to take the biggest hit under Div 296

The potential impact of the government’s $3 million super tax on farmers has been a hot-button issue since it was first proposed, with the problems of taxing unrealised gains that are tied up in illiquid assets appearing as an obvious issue.

Farmland, in particular, creates some hurdles, with Bryn Evans, financial adviser and partner at Integro Private Wealth, explaining that while some clients that have balances above $3 million are in portfolios holding liquid assets generating “a bit of a high yield”, often this doesn’t include farmers.

“Where we see a few potential issues is around people that have used self-managed funds to hold larger, lumpier, potentially more illiquid, lower-yielding assets, like farmland,” Evans said.

“This is less so for commercial property. It tends to still need to generate a decent yield, but farmland is one where we’re seeing a potential impact on this particular issue.”

Significantly, this can also impact clients that haven’t yet reached preservation age.

“We have clients who have land in their super fund and have the ability to shift that asset to a different structure for either partial or nil consideration, because they’ve met preservation, if they want to do that,” Evans said.

“But it might be that a succession plan where some land has found itself, maybe through a death benefit rollover or something, to a younger member that may not be at preservation, or they bought some land in their super fund a while ago, they’re under 60 and that land has appreciated considerably.”

The real issue for farmers when it comes to the proposed super tax is that it has the potential to force a sale at a point that is less than ideal for the member.

Evans added that in Western Australia where Integro is based, farmland has grown really strongly in recent years.

“We’d see clients who would have those large, lumpy, illiquid assets they don’t want to sell,” he said.

“Farm blocks only come up every few decades, so they want to make sure that they keep what they’ve got, and their potential ability, if they wanted to transfer it out of super or what have you, that pretty much have to come up with full consideration.

“There’s always a range of how much you can value an asset for, but that’s probably where we see a few issues coming down the line.”

If these farmers get hit with a “cash bill for a non-cash increase in value”, it could cause significant cash flow issues.

“Farming is very capital-intensive, variable profitability – if it comes through that the value has gone up by X per cent and they get a cash bill for that, it might not have aligned with a particular year where they’ve made very much money at all,” Evans said.

“Cash flow is always tight; there’s always things to buy for farmers. That’s just particular space that we see the need for careful planning and advice. I think going forward, it’ll probably change the way people hold assets in super.”

That could be the point

As ifa has noted previously, it is becoming increasingly clear that what the Treasurer actually wants is to disincentivise large super balances that are no longer used to support retirement income.

Unfortunately for farmers who have already structured their estates to include their farm within a self-managed super fund (SMSF), there isn’t always a clean way to unwind this holding.

“I think people have made decisions about what to hold in their super that suit their own circumstances,” Evans said.

“That might not suit the government’s agenda, but they’ve been allowed to make these decisions. There’s been no rule against it. And they find themselves with these types of assets, which the government may be thinking, ‘That’s not the kind of thing that we want people to have in their superannuation fund’.

“There’s obviously no proposal to change the type of assets, just the way that they tax them. I do see, with this coming into place, we’ll see how it’s legislated, but I do see a change in the way that people would have the ownership of those types of assets within superannuation.”

The adviser doesn’t see it being as much of an issue for commercial property and SMSF members who operate a business out of a premises through this structure given they generally have a “decent amount of cash flow coming through” that can help pay off whatever tax bill they receive.

However, the “idiosyncrasies” that come along with the way a farming business operates lend it to being a much “lower yielding” type of asset.

“I see farmland probably being something that accountants and advisers and things like that would say that’s not the kind of asset that we would probably hold,” Evans said.

“But for people who have those assets already in their superannuation fund, there are options available to people where they’ve met preservation age, but there really isn’t any mathematical benefit now, no incentive to hold these kinds of assets.

He added: “For people who have those types of assets in the fund, who have not met preservation age, we’d have to do some serious thinking, modelling, consideration about if it’s worth them transferring it out, if we just need to cop the cost of the tax bills as they come through, and account for that.”

Importantly, Evans reminded advisers handling clients who will be impacted, “each individual circumstance would be different”.

“Going forward, and especially with the lack of indexation on the threshold, I think that it will change the nature of the types of assets to be probably more of a mix between income and capital growth-type assets, as opposed to something that is quite low yielding and you’re holding more for capital growth,” he added.