Structuring your business and profits for generational transfer

Net asset value of family farms

The ‘typical’ broad acre family farm now has net farm assets of over $4 million. Net Asset Value is comprised of land, water, machinery and livestock less bank and machinery liabilities. Net Asset Value has tripled over the last twenty years due to a combination of farm expansion and rising land and water values.

When considering generational transfer this steadily increasing Net Asset Value can lead to concerns as to what is a ‘fair’ allocation to both the on-farm and off-farm children.

In the context of this paper, generational transition, generational transfer and succession planning refer to the same process and the terms can be used interchangeably.

Business viability

Successful generational transfer requires the current business to be viable. When commencing or reviewing the progress of succession plans it is important to check the financial health of the current business. This ‘business health check’ can assist to fine-tune current performance and provide a useful communication tools for all family members to explore and discuss realistic and viable options for the generational transition.

Key measures of financial viability are profit for debt servicing and asset availability as security.

Suggested indicators of business viability are listed in Table 1.

Table 1. Indicators of business viability.


Additional ‘business health check’ guidelines are provided further within this paper.

The timeline for generational transition

Transfer of land is often the main focus with succession planning, however for the best outcome for all concerned the transfer of land should be the last consideration. The transition should firstly focus on the people and their role in the business and the opportunity for them to be rewarded for their efforts.

The transition between generations is a journey with distinct phases. This total journey can take up to 25 years. Irrespective of the timelines that are required for individual circumstances, there needs to be a clear and well communicated plan that is followed to ensure all are comfortable with the timelines and processes.

The timelines are determined by the choices and preferences of the people - both the older and younger generations.

As a suggestion, the journey of transition can progress as with the following timelines:

  • 2 to 6 years - Management/Responsibility
  • 3 to 10 years - Income/Profits
  • 10 to 25 years - Existing Assets (not new purchases)

When considering generational transition the priorities for asset allocation can be summarised as:

  • Parents are financially secure in retirement.
  • The on-farm children have a viable farm to continue growing.
  • The needs of the off-farm children are recognised.

These priorities set the order for planning the transition.

Having the discussion

When planning this journey of transition then the order for family discussions is recommended as:

  • Parents.
  • On-farm children.
  • Off-farm children.
  • All together.

Acknowledging the people

  • Dedicate time to plan.
  • Understand the needs of each individual.
  • Communicate with all. No secrets.

Planning meetings

Modern family farm businesses are much more complex than a generation ago, hence there’s a need for improved planning and communication. Regular meetings to discuss strategic direction are becoming the accepted practice for progressive businesses and can cover all aspects of the business. When planning meetings are scheduled to include a discussion on the plan for succession it’s recommended to have an independent chairperson. An independent chairperson can ensure that each individual has the opportunity to raise new ideas and that all individuals are listened to.

A typical agenda for a planning meeting is: 

  • Current

         Seasonal outlook

         Business financials. Budget to actuals update.

         People, achievements, rewards and lessons learnt

  • Where to


         Breakeven income, profit forecast.

         Next 5 years
         Scale – expand the farm scale and/or off-farm investment.

         Machinery replacement policy.

         Management – areas to transition.

         Work/life balance.

  • How to

         Allocating the profits – on farm and off farm assets.     

         Timeline for transition of management, profits and ownership.

         Regular family meetings to review the ‘Plan’.

Business structures for profit sharing

The transition of management and responsibilities can happen without change to the business structure. After transition of management the next stage is the sharing of income/costs and hopefully profits. Sharing of profits is typically 3 to 6 years after the return of the next generation to the farm business. Options for profit allocation are presented in Figure 1 and Figure 2.

For the purpose of illustration, Options 1, 2 and 3 assume the business trades as a Discretionary Family Trust and the business profit is $200,000 in all cases.

Readers should seek their own independent advice from a qualified advisor on structures that suit their personal and business circumstances.

Option 1

Receive a trust distribution as a beneficiary of the existing Family Trust.


Figure 1. Discretionary Family Trust

Option 1 offers the following advantages and disadvantages:

  • Advantages:
    • Easy to establish, profit allocation can be flexible to assist with tax planning.
  • Disadvantages:
    • Profits are retained within the business hence individuals don’t have independent equity growth.
    • Relies on the ‘promise’ that things will be yours in the future.

Option 2

Receive a trust distribution to a separate entity (New Trust) as a beneficiary of the existing Family Trust.


Figure 2. Trust distribution to separate (new) family trusts i.e. Family trust as beneficiaries.

Option 2 offers the following advantages and disadvantages:

  • Advantages:
    • Profit allocation can be flexible to assist with tax planning.
    • Individuals can utilise the profit allocation to invest in assets either on-farm or off-farm for their individual benefit and with separate ownership.
    • Enables the older generation to allocate profits to non-farm assets for estate planning.
  • Disadvantages
    • Additional compliance costs for the new entities.
    • Profit allocation is determined at the individual family level and not necessarily at the business level

 Option 3

Start a new business entity alongside the existing family trust. This new entity can farm in its own right by leasing or buying new additional land and utilising the machinery of the established parents’ trust, often at subsidised contract rates.


Figure 3. New business entity alongside existing family trust.

Option 3 offers the following advantages and disadvantages:

  • Advantages
    • The next generation:
      • Develops skills in business management including buying, selling and compliance.
      • Have opportunity to develop a ‘track record’ with demonstrated business performance (credit rating) to support future land or machinery purchases.
      • Can gradually purchase and upgrade machinery into the next generations’ entity.
      • Can increase eligibility for government support/exceptional circumstances, etc.
  • The older generations’ business assets can be less exposed to future risks.
  • Disadvantages
    • Additional compliance costs, two separate trading entities.
    • Can cause concerns with regards to whose paddocks are to be done first.

 Business life cycle

Growth in equity ($) over a 25 year business cycle is illustrated in Figure 4. The stages of growth have different priorities for profit allocation and have different performance benchmarks.

When considering the stages of growth in terms of the options as presented earlier in this paper:

  • Option 1: New generation joins the current entity - corresponds to the ‘mature’ (parents) business moving into the ‘renewal’ stage with the introduction of the younger generation.
  • Option 3: Separate entity trading alongside the current business - corresponds to the ‘emerging/growing’ stage in the business life cycle as the younger generations’ new entity is established alongside the ‘mature’ parents’ business.


Figure 4. The business life cycle which shows the key stages over time and the key financial focus of the business during the stages i.e. building cashflow, investing in business growth and building financial buffers to assist future transition.

Business entities

The transition from one entity to the next is driven by growth in scale, equity and profits requiring additional tax planning and asset protection. The following business entities are listed from simplest to most complex:

  • Sole Trader.
  • Partnerships.
  • Trusts.
  • Company.

Discretionary family trusts are the most common business entity for the current typical family farm. In recent years the growth in farm scale and larger profits has contributed to an increase in use of companies as a trading entity mainly for the tax planning benefits.

 Business health checks

If primary business indicators are sound then the business is financially healthy and there may be no need to drill in any further. However, secondary indicators provide signposts to identify strengths, weaknesses and opportunities for business improvement.

Table 2. Business Health Check Indicators.


Profit drivers

Profit drivers for farm businesses are commonly identified as:

  • Farming system/enterprise mix.
  • Costs.
  • Income volatility across years.
  • Management/decision making.
  • Efficiency/timeliness.

Things that do not consistently drive profit are:

  • Location.
  • Scale.
  • The newest and best machinery.

 A viable scale for the next generation

Indicator guidelines can be used in reverse to calculate a viable scale for an ‘emerging/growing’ farming family.

The scenario detailed in Table 3 can assist when setting goals for generational transition or for business growth to include additional labour units.

If the next generation family goal is to have $115,000 available for living, school fees, tax and debt repayment then the guidelines as provided in Table 3 can be applied to determine the asset value necessary to sustain a family unit at their targeted income.

The following assumptions are made for the calculations detailed in Table 3:

  • Surplus is 8% of income.
  • Costs as % of income are:
    • Overheads (rates, insurance, prof. fees) - 8%
    • Farm inputs (fertiliser and sprays, seed, etc.) - 30%
    • Machinery (fuel, repairs, contracting, capital replacement) - 28%
    • Finance (interest, bank fees and rent) - 11%
    • Labour (own living, school fees, casual employees) -15%
  • Income is 15% of current asset value (land, water and machinery).
  • Value of machinery is the same as annual farm business income.

Table 3. Viable scale for an ‘emerging/growing’ farming family.


The example illustrated in Table 3 confirms that the next generation requires a significant asset contribution from the older generation if they are to achieve a viable scale. Examples of how this can be achieved are:

  1. Lease their parents’ land to the value of up to $2.8 million with a subsidised land rental.
  2. Transfer land of up to $2.8 million from the parents to the on-farm child with a payment to the parents of $900,000 which can be quarantined as an asset for the non-farm children.
  3. Purchase new land with some equity contributed by the parents. Total debt, both internal to parents and external to bank not exceeding $900,000.
  4. Combinations of the above.

The parents’ preference for asset ownership determines whether land is transfered or ownership is retained by the parents. If ownership is retained then the commencement of financial independence for the next generation can be through the future growth of the family business. For example, future land purchases can be in the name of the next generation with debt repaid through the family trading entity.

There are many variations on how the next generation can transition into a viable farming business. The best option for each business is dependent on the needs and preferences of the parents, then the next generation.


Generational transition in family farm business is about understanding the needs and preferences of the people including those in the business and those not in the business (i.e. off-farm).

Business profitability and the position of the business along the business life cycle will influence the timelines and the most appropriate business structure to facilitate the generational transition.

Establishing a ‘line in the sand’ for equity at the time of entry of the next generation can assist with the financial security of the older generation and can also assist with the planning.

More information

Phil O'Callaghan

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The information in this paper is general in nature and should not be taken as personal professional advice. Readers should seek their own independent advice from a qualified adviser and not rely solely on the general nature of information in this paper.