A TIMELY REMINDER ABOUT THE CONDITIONS FOR ELIGIBILITY FOR THE DUTY EXEMPTION ON TRANSFER OF FARMING PROPERTY BETWEEN FAMILY MEMBERS.
The duty exemption for transfer of farming property between family members in Western Australia is not a new exemption, but to be eligible for it there are a number of conditions to satisfy.
It is imperative to ensure you meet all necessary conditions for eligibility before taking any steps to transfer or part with possession of your farming property to a family member. Failure to meet the conditions can result in duty being assessed and payable, the cost of which can be prohibitive.
Conditions for eligibility
The transfer between family members of farming property is exempt from transfer duty, but only if:
- Each transferor was using the farming property in the business of primary production immediately before the transfer takes place; AND
- At the time when the liability for duty on the transaction arose, each transferee intends to continue to use the farming property in the business of primary production.
If the family farm is owned instead by a company that is owned by family members, the transfer of shares between family members may also be exempt from landholder duty.
Some of the relevant definitions and questions to carefully consider for eligibility, include:
- Is the property being transferred "farming
land"?
If not, the exemption will not be allowed. - Is every "transferor" using the "farming
property" in the business of "primary production"
immediately before the transfer takes place?
If not, the exemption will not be allowed. - At the time of entering into any agreement for the transfer, does each "transferee" intend to continue to use the "farming property" in the business of "primary production"? If not, the exemption will not be allowed.
- Is the "transferor" the trustee of a unit trust
or a discretionary trust?
Note: the definition of "transferor" excludes land held by the trustee of a unit or a discretionary trust from the exemption. - Is any part of the transferred farming property leased to a
third party?
Note: Land may be treated as being used in the business of primary production even where some, but not all, of the land is leased to another person, however, this only applies where the lessee is using the leased land solely or predominantly for the purposes of silviculture or reafforestation. - Is each entity that will be using the farming property in
the business of primary production related to the transferor and
transferee, as is relevant?
Note: It is not relevant whether a transferor was using, or a transferee intends to continue using, the farming property in the business of primary production personally or through an entity or through a combination of entities to which the transferor or transferee is related. What is relevant, is that they must be related. The definition of "related entity" is therefore relevant.
Further note however, due to the definition of "family member" in the Duties Act (WA), the transferor cannot be related to themself. As such, there are a number of common transfer scenarios between 'family members' (particularly, for example, certain transactions involving trusts, shareholders of a company, partners of a partnership etc), where the duty exemption will not be allowed. The OSR website sets out a number of common examples where the exemption will not be allowed (and duty will be payable), because they are not a "related entity". - Did the transferor acquire the farming property, interest
in the farming partnership or shares in the farming corporation, in
the past 5 years?
Note: Where duty was not charged on an exempt family farm transaction and another transaction occurs within a period of 5 years for the same farming property, duty is chargeable on the subsequent transaction even though it would otherwise be considered an exempt family farm transaction.
These are only some of the relevant issues to take into consideration for eligibility for the exemption. For full details as to the requirements and the meaning of the various defined terms, you should refer to the Office of State Revenue (OSR) website and/or seek legal advice.
How to apply
To apply for the exemption from duty, the transferees must complete the "Exempt Family Farm Transactions" Application Form (available from the OSR website), and lodge it at OSR together with the relevant transaction record for the transaction (ie the offer and acceptance and/or transfer of land, or a transfer duty statement), for assessment.
You will also be required to lodge with OSR copies of any relevant title searches for the property; income tax returns (or latest financial accounts) of any individual or entity currently farming the property; copies of any relevant trust deed and/or partnership agreement; a company extract (search) from ASIC for any company involved; and a copy of any lease agreement (if the property is leased).
In our experience, due to current caseloads at OSR the timeframe for them to assess such applications (or duty) on these matters at present, can take up to approximately 6 months. Finalising the registration at Landgate of a transfer of farming property if seeking the duty exemption, cannot occur until OSR assesses the application.
Example case study
A father owned a farming property on which he operated a farming business. As a succession plan, the father handed over possession of the farming property to his sons – who then split the property between themselves and commenced farming their respective portions under their own separate entities.
No transfer of land forms (or any other documents) were signed at the time of handing over possession of the farming property, to document the transfer of ownership to the sons. Several years later, when documenting the respective transfers of land to the sons, applications for exemption of duty were lodged at OSR for assessment.
There is a risk that the duty exemption will not apply in this instance, because the father (as transferor) was not carrying on the farming business immediately before he transferred the land to his sons.
This matter highlights the importance of obtaining legal and financial advice prior to any dealings with your farming property. The delay in documenting the transfer of ownership of the farming property in this scenario, may result in duty being payable.
Seek advice
It is important to properly understand exactly what is required by OSR in order to be eligible for this duty exemption, otherwise you risk having duty assessed and payable.
It is strongly recommended that you seek financial and legal advice in relation to any dealings with your farming property, not just for transfers of the property between family members. Such advice is recommended:
- prior to purchasing a farming property, to ascertain what is the best entity in which to purchase, for your particular family circumstances – and properly setting up any relevant partnership, company or trust arrangements;
- in relation to succession planning for your family farming business, and transfer of the business and/or property;
- for Estate planning purposes;
- as soon as possible following the death of any one of the owners;
- prior to transferring a farming property (to either a family member or unrelated party); and
- prior to handing over possession of the farming property to any family member or third party, for the conduct of the farming business.
For advice on whether your farming property transfer between family members is eligible for the duty exemption, please contact partner Emma Leys on 08 9321 3755.
The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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