One of the greatest problems facing primary producers is to be able to cater properly for retirement. They are often “asset rich but cash poor”.  Ideally they would like the farm to stay with the family but, at the same time, they need enough capital to fund a reasonable lifestyle during retirement. 

Unfortunately, the continuing family farmers cannot always afford to purchase the property, without incurring prohibitive debt.

Complete planning for primary producers needs to be undertaken. Such a plan will address areas such as the diversification of assets (on and off farm), business cash flow, non-farm expenditures, liquidity, taxation, life and general insurances, estate and succession planning and retirement planning.

When deciding what to do in relation to the investment of farm profits, there are five main alternatives and a mixture may be appropriate:

• Repayment of debt
• Farm improvements
• Acquisition of more land
• Off-farm investment
• Higher personal expenditure (Not Recommended!)

On-farm investment must naturally be considered first and there are often sound reasons for directing profits back to the farm. It always makes good sense for people or businesses to invest in what they know best and there are often family or lifestyle reasons for improving the farm. There may also be taxation reasons for investing money back into the farm.

The investing of funds back into the farm based upon taxation alone suggests the absence of a solid business plan. This could demonstrate the lack of awareness of what could potentially be severe adverse financial and wealth management consequences.

For example, there is no point embarking on a capital expenditure program if it simply results in the over-capitalisation of the farm. This can result in future liquidity problems, or not add any value when it comes time to sell the farm. It may also mean that future succession and retirement plans are compromised due to a lack of retirement capital.

It is also a basic rule of thumb to diversify capital in order to reduce risk. Changes in local and overseas markets, the Australian economy, government legislation and weather all can adversely affect specific agricultural industries and seriously undermine the value of the farm assets.

When evaluating on-farm investments it is often helpful to classify each alternative into one of the following categories:

• Critical for ongoing operations
• Improvements to output or cost reductions
• New opportunities

The critical investments must proceed. However, the remaining two categories should be fully analysed to determine the expected return from each investment, the risks undertaken, liquidity and cash flows. These should be compared to off-farm investment returns to determine the most appropriate actions.

Off farm investments allow additional diversification and reduce the necessity for the succession owner of the farm to repay unnecessary rental or loan repayments.

A strategy that balances on farm and off farm investments needs to be put in place at an early stage.  The strategy should include, but is not limited to:

• Superannuation
• Direct, listed and unlisted non farming property
• Direct equities, managed funds
• Domestic and international investments
• Cash and fixed interest

The aim of the off farm investments should be to provide opportunities for growth, and tax effective income.  It should also be viewed as a long-term investment that may not necessarily be used to support the farm income in the short term.

Whilst superannuation holds negative connotations to many people, it should simply be viewed as an entity in which investments can be held, whereby the earnings on the investments are taxed at a maximum of 15% as compared to the marginal tax taken from profits/income created by individuals.

At retirement, superannuation can either be taken as a cash benefit (individual taxation consequences would apply) or used to provide a tax effective income stream (Allocated Pension or Annuity).

These days Self Managed Superannuation Funds offer trustees a wide scope of investment opportunities.  However the role and responsibility of trustees should not be taken lightly.

Whilst your farm may always be your greatest asset, the developments of a diversified investment portfolio of off farm investments over time will provide greater understanding of investment markets, and allow for liquidity and a passive income stream to be developed for retirement.

Another critical issue for primary producers is wealth protection and estate planning.

Often, income protection insurance is not obtained. Where it is held, often the policies are not appropriate for the needs of the farmer. It is critical for farmers to have non-cancellable (by the insurer) contracts that are based upon farm turnover, not profit. Where based upon profit, high levels of expenditure or clever tax planning may mean that reported profit is very low. The insurer will only pay a claim based upon this amount which is unlikely to adequately provide for future needs.

Cover may also need to obtained for death, disability or trauma for many reasons, including providing capital for the farmer or their spouse given unforeseen events that enables them to achieve their future lifestyle goals whilst passing the farm over to children.

Primary producers have special planning requirements. Carefully prepared plans may need the assistance of professional help from consultants, accountants, financial planners and solicitors to ensure the future wealth position for farmers and their families are maximised and protected.

Zach McArthur is a Representative of Investor Financial Planning.  The information contained herein is for information purposes only and does not represent advice. In order for recommendations to be made which are appropriate for your needs, objectives and goals, please contact your financial adviser. Some of the information provided has been sourced from Prescott Consultants.

Source: Primary Focus, Issue No.2, 2005