Optimising Tax Benefits in Rural Land Investments

Claiming depreciation on a rural/agribusiness property each financial year is an essential tool for farming clients looking to maximise the benefits of their income generating property.

The challenge in successfully maximising tax benefits is to accurately assess the depreciation of the income producing assets and claim against structural improvement, capital works and equipment used in primary production.

A recent case study from the Acumentis tax depreciation team reveals the complexities that may affect the ability to claim deductions and write-offs for a portfolio of rural properties.

CASE STUDY – Unlocking Tax Benefits

A client acquired the aggregation of rural land parcels with the goal of building a substantial farming portfolio and optimising future tax planning.  To capitalise on financial returns, they engaged our services to prepare tax depreciation schedules for the newly acquired properties. 

Inspection & Assessment

The inspection phase entailed the assessment of 17 farms over an 18-day period, equivalent to 211 working hours.  The Acumentis inspection team travelled a cumulative distance of 4,700 kilometres to evaluate properties spanning a vast area, comprising roughly 76,761 hectares, and encompassing 115 Titles.

The aggregation of the farms had been purchased at different dates adding to the complexity of the process and the requirement was for multiple reports to be completed.  26 comprehensive reports were produced for the portfolio accurately reflecting the unique characteristics of each farm and the specific conditions tied to their individual acquisition dates.

Challenges in Claiming Tax Benefits

Challenges emerged during the process, including the inability to provide a contract of sale and settlement date for one of the properties, which rendered an approximate sum of $2,300,000 in tax benefits non-claimable.  

Additionally, some of the subject farms had already changed ownership or were in the process of being transferred since the date of inspection.  This development limited the ability to claim tax benefits for these properties illustrating the significance of settlement certificates and purchase contracts in creating depreciation schedules.

Conducting a tax depreciation schedule is critical for land parcels about to transfer, especially if they were purchased within the last 5 years. This allows for the backdating of benefits up to 5 years, mitigating potential tax liabilities when selling.

Many farmers facing complete property sales may encounter substantial tax obligations. Utilising depreciation schedules can help offset some of these taxes, provided they meet eligibility criteria.

Furthermore, the client's financial performance, which produced an annual turnover exceeding $10 million, posed another challenge, as this can impact the eligibility for claiming small business deductions.   It is still important however to collate all the relevant information so that your accountant can determine the specific circumstances as to what can be claimed.

The Outcome

Extensive analysis revealed that only one of the client's entities may qualify for the small business instant asset write-off.  This potential eligibility could result in substantial first-year tax benefits of around $3 million for the 2022-2023 financial year.  These significant financial gains are specific to the first year, emphasising the potential returns attainable through comprehensive tax depreciation planning and meticulous assessment, despite the complexities of rural land aggregation. 

The total potential deductibility for the assets’ remaining lifespan is estimated at $19m, with the final determination dependent on the client’s accountant and the specific circumstances.

In summary, this case study underscores the intricacies of tax planning in the rural land aggregation and highlights the importance of documentation and understanding property transactions consequences for unlocking tax benefits.  Despite the challenges, the ultimate outcome demonstrates the substantial returns attainable through astute tax depreciation planning and strategic assessment.

When undertaking a tax depreciation assessment, it is mandatory that we physically inspect the farm and importantly this is always carried out by an Acumentis agri property specialist with the local knowledge and expertise of rural property and in accordance with ATO rules and guidelines.

Nathan King
National Director – Advisory, State Director – WA Operations
— Perth Property Valuers
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