FAMILY farms held in Self-Managed Superannuation Funds (SMSFs) are under threat from the proposed application of Capital Gains Tax (CGT) to unrealised gains.

If passed by both Houses of Parliament, this legislation could put farming families who have their land holdings in an SMSF in significant financial difficulty.

The Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 is currently before the House of Representatives, however, there is concern being expressed by some crossbench upper house members about the Bill as it is currently framed.

In the upper house, Senators Jacqui Lambie and David Pocock have reservations about the legislation and its potential impact on family farms.

The Bill is a particular worry to farmers since the recent rural land boom has, in spite of its correction since 2022, inflated farm values to a level where the potential CGT burden could be very high.

If an unrealised capital gain is triggered by an event such as the death of an SMSF member and if, in addition, there are low amounts of liquid assets such as cash or shares, land may have to be sold.

The National Farmers’ Federation (NFF) acting chief executive, Charlie Thomas said earlier this week; “This (CGT event) may leave farmers with a terrible choice: sell the farm to meet these new tax and liquidity obligations or increase their lease rates so much that their own children and grandchildren can’t afford it and leave the industry.”

This observation is true in part although the Australian Taxation Office (ATO) is quite clear that rental levels must be to arm’s-length market levels and thus cannot be arbitrarily raised to pay a particular tax assessment.

The number of farming families who will, potentially, be affected by this is high.

Peak industry body The SMSF Association (SMSFA) was cited by the NFF as having estimated that some 3500 farming families across the nation could have a latent tax liability.

Many farms were transferred into SMSFs in 2007, when then Federal treasurer, Peter Costello allowed individuals to transfer $1 million into their superannuation accounts without any tax accruing.

This was at a time when land was worth roughly one fifth of its current value, indicating the scale of the problem at hand.

At present, it appears that if the funds in an SMSF are in pension mode, as opposed to accumulation mode, that CGT would not be assessable.

However, it must be stressed that the advice of accountants and/or financial planners should be sought.

The current situation may be described as an example of the ‘legislative risk’ to which SMSFs are vulnerable.

It is clear that they are under constant scrutiny by politicians and sections of the media and are seen by many as a potential source of additional tax revenue.

Finally, it should be stressed, we are talking about draft legislation which might well not be passed or, if enacted, may have been amended to the extent that it is significantly different to the Bill currently before Parliament.

A messy situation awaits clarification.