Capital Gains Tax on transfer or sale of the Family Farm

Capital Gains Tax on transfer or sale of the Family Farm

For most farmers, there will be no payment of capital gains tax on the sale of the family farm.

The small business CGT concessions are available to most small farmers because they are eligible for the concessions as their turnover is less than $2,000,000.00 and the value of their net assets after the family home and superannuation is less than $6,000,000.00.

If the farmer’s principal place of residence is at the farm, then the value of 2 hectares of land under the house can be carved out of the sale consideration by claiming the main residence exemption for that component. As long as the house is on the land then the taxpayer can allocate the most valuable two hectares of land to the main residence exemption calculation.

There are four small business CGT concessions.

 

1. Small Business 15-year exemption.

If the taxpayer is over 55 years of age and has owned the farm for at least 15 years and actively farmed it for at least 7.5 years he or she should not pay CGT on any gain from it’s sale.

It is further possible to contribute amounts to the farmer’s super fund from the small business 15-year superannuation without impacting the non-concessional contribution limits.

 

2. Small Business 50% active asset reduction

A farm is for the small business purposes an active asset if it has been actively held for the purpose of carrying or a business for a total of at least 7.5 years during the test period if the farmer has owned it for 15 years or more or for at least half of the test period, if it was owned it for less than 15 years.

The test period commences from when the taxpayer acquired the asset and ends at the earlier of the CGT event and when the farming activities ceased if it ceased in the 12 months before the CGT event.  A taxpayer only pays income tax on 50% of the capital gain on disposal. This concession applies in addition to the general CGT discount. Effectively the assessable gain is reduced by these means to 25%.

 

3. Small business retirement entitlements

A capital gain from the sale of an active asset is exempt from CGT to a lifetime limit of $500,000.00. If the taxpayer is not yet 55 years of age then to be eligible for the concession  he or she  must pay the exempt amount into a  superannuation fund or a retirement savings account.

 

4. Small business rollover

This concession enables a taxpayer to defer all or part of the capital gains by rolling over the gain if the taxpayer buys a replacement active asset.

This replacement active asset can be purchased up to one year before or up to two years after the last CGT event in the income year for which the taxpayer chooses the rollover.

A farmer purchasing a new farm can thus defer the capital gains by rolling the exempt gain into the purchase of a new farm.