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Example of Primary Production Concession & other Related Issues
Incidental benefits allowed
Whilst handing over control, the individual and their spouse would still be able to retain a life interest in their principal residence and the right to some incidental fringe benefits, such as:
- farm produce for personal consumption,
- water, fuel, gas or electricity used in the principal home in which they retained a life interest, and
- any other non-cash benefit that is minor and provided on a basis that is infrequent and irregular.
Access to income during the deprivation period
If the individual and their spouse are serving a 5-year deprivation period due to the gifting of the assets of the primary production trust they will be able to access income (other than as an income beneficiary) from the private trust, up to the current income threshold of Family Tax Benefit Part A. Access to this income will be during the deprivation period only. This income could be in the form of wages or consulting fees but cannot be in the form of distributions as the individual and their spouse are no longer income or capital beneficiaries of the trust.
Example of primary production concession
Joe and Edith are retired farmers, aged 66 and 65 respectively. They have handed over operation of the farm to their son Bill. Joe and Edith are both receiving service pension. They made succession and retirement plans more than 6 years ago and transferred their farm assets to a discretionary trust. Joe and Edith are the appointors of the trust and they live in the family home, which is worth $80,000 and is part of the trust assets. The total value of the trust is $900,000. It consists of the farmland, machinery, livestock and the family home. They also have a liability against the farming property of $110,000. Their (primary production) net adjusted taxable income over the last 3 tax years is ($30,000+$25,500+$23,000) ?3=$26,166.
While Joe and Edith are happy to give up their interest in the trust and for their son Bill to have control of and run the farm, they are concerned that he may sell the property and move into town. They decide to take advantage of the concession and retain a right of veto should Bill decide to sell. As the primary production assets of the trust are more than 70% and the net value of the primary production assets are less than $818,000 (($900,000-$110,000)-$80,000=$710,000) and the average adjusted net primary production income for the previous 3 tax years is less than the FTB Part A income threshold, Joe and Edith qualify for the concession. In addition, Joe and Edith maintain a life interest in the family home and are able to access income from the farm during their deprivation period. However, if Joe and Edith accessed this concession and gave away the trust assets before 1 January 2002, they would not be subject to the deprivation provisions. If this action is taken on or after 1 January 2002 the deprivation provisions apply to the assets they have 'gifted' to their son.
The principal home has the meaning given by subsection 5LA(1) of the VEA and subsection 5LA(2) of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.
- the residence itself (e.g. house, flat, caravan),
- permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
- [glossary:curtilage:DEF/Curtilage] (i.e. two hectares or less of private land around the home where the private land use test has been satisfied, or all land held on the same title as the person's principal home where the extended land use test has been satisfied), or
- any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.
According to section 5H of the VEA income is:
- an amount earned, derived or received by a person for the person's own use or benefit;
- a periodical payment by way of gift or allowance; or
- a periodical benefit by way of gift or allowance.
A discretionary trust is a private trust set up by an individual or individuals either to:
- hold property or investments, or
- run a business.
In virtually all cases the trust deed gives absolute discretion to the trustee to distribute both income and capital among the beneficiaries as he or she sees fit.
According to section 52ZZZL of the VEA, the adjusted net primary production income within subdivision K for a particular tax year is the sum of, where a primary production enterprise is being carried on by:
- an individual, 100% of the net income of that primary production enterprise,
- a company being a controlled private company in relation to the individual throughout that tax year
100% of the net income of that primary production enterprise, or
a lower percentage if the Commission determines otherwise,
- a trust that was a controlled private trust in relation to the individual throughout that tax year:
a business partnership of which the individual was a partner throughout that tax year:
The Commission must comply with any relevant decision-making principles.
A life interest arises when a pensioner:
- acquires the right to use assets or the income produced by those assets, or
- transfers a non-exempt asset to another person, but retains an interest in the asset, or
- is created by the will of a deceased individual.
A life interest remains current until the pensioner:
- sells the asset, or
- formally surrenders the asset.