The Ultimate Guide to Buying Rural Real Estate

Many of us have a dream of buying a farm to escape the hustle and bustle of city or town life.

Especially since COVID-19, many people have moved or are considering moving to regional areas for a “tree (or sea) change,” as many can now work remotely. As a result, rural properties are selling like hot cakes.

Owning rural property can be very rewarding — plenty of room for a horse, a motor bike, and plenty of time to sit back on the verandah and watch your beloved cattle graze away, making money while you relax!

But the reality is, there's a lot to consider when buying rural property. The dream of owning a farm can very quickly turn into a nightmare if you don’t dot the i's and cross the t’s.

This guide outlines the top tips and traps to consider when buying a farm, including:

  • How do you become a primary producer?

  • What's the best business structure to buy rural property?

  • What's the optimal mix of debt for funding?

  • Is it ideal to be registered for GST?

  • How can you offset losses against other taxable income?

  • What are some common tax deductions for farms?

Let’s get into it step-by-step.

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How to become a primary producer?

Usually the first question we’re asked when approached to give advice on buying rural property, is what do I have to do to become a primary producer?

Most people have spoken to friends or colleagues about this, and have some basic knowledge of the requirements.

The first step is to ensure that you would be deemed to be running a business. This will enable you to potentially claim costs associated with the purchase of the property (e.g. interest deductions) and the ongoing running costs.

In determining if you are running a business, the following factors will be considered:

  • Whether the activity has a significant commercial purpose or character.

  • Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity.

  • Whether there is repetition and regularity of the activity.

  • Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business.

  • Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

  • The size, scale and permanency of the activity.

  • Whether the activity is better described as a hobby or a form of recreation.

There are no specific benchmarks in relation to satisfying the above criteria.

For example, there is no minimum farm size, nor a specific minimum number of head of livestock that you are required to hold that will automatically see you being deemed to be running a business.

Rather, it’s a combination of factors, and an operation for example, that only consisted of 40 acres and running eight head of cattle may find it difficult to justify the existence of a business.

It is important to take advice in this regard, and certainly the preparation of a detailed business plan will assist you here.

What's the ideal structure to buy rural property?

The next question we get asked when it comes to buying rural property, is in what name should we buy the property?

This is certainly a critical consideration, and careful planning is needed to ensure you get the most appropriate structure for you.

The main options available to you are:

  • Buy the property in an individual’s name, and operate the farming business as a sole trader.

  • Buy the property in joint names, and operate the farming business as a partnership (most commonly a common law partnership with a 50/50 ownership split).

  • Use a structure such as a company or discretionary trust.

  • Buy the property through your self-managed superannuation fund (SMSF).

  • A combination of the above. For example, you might buy the property in a company name, but have an individual sole trader operate the farming business.

The truth is there is not one correct answer – it really depends on your circumstances.

Assuming you are looking to buy the property with your husband, wife or partner, here’s some things to consider:

  • Do you own any other assets and in whose name are these assets held?

  • Are you the director of a company? Or are working in a high risk profession?

  • What are your respective incomes as a couple?

  • Is there going to be debt funding used to assist with the purchase?

  • What is the anticipated profit/(loss) position of the livestock trading enterprise?

  • Does the property contain (or is there an intention to build) a residence that will be the main residence of the family?

  • What is the anticipated ownership period and prospects for capital growth?

Here are some common scenarios and some possible purchasing structures.

Example 1

Let’s assume Tom and Lola are looking to buy a farm. Tom works in the mines, earning a salary of $180,000. Lola is a doctor, running her own medical practice, with annual taxable income of $300,000.

Given Lola is working in an occupation where there is a high level of professional risk, it would be advisable not to hold any significant assets in her name. Further, given Lola’s income exceeds $250,000, she would not be able to offset the loss generated on the farm against her other income.

With this in mind, a decision is made to buy the farm in Tom’s name, and he will conduct the farming business as a sole trader. This also allows them the benefit of using the main residence capital gain exemption in the event of a future sale.

Example 2

In this scenario, let’s assume George and Patty are running a family business. They use a company structure to run this business, of which they are both directors. They draw a wage of $150,000 each from the business. They consider the liability risk in their business to be low.

With these facts in mind, it is agreed to purchase the farm in joint names, and form a partnership to run the farming enterprise. As they consider there to be a low risk of professional risk, and both can offset their share of the loss from the farm against their other income, this provides the best outcome for them and also avails them of the main residence exemption should it be required in the future.

Example 3

This example covers a more complex structure. Joe and Betty run a construction business through their family company. Joe is the sole director, while the shares in the company are owned by their family trust.

They each draw a salary of $300,000 from the business, which is used to fund their lifestyle. They own a house at the coast which is used as their main residence, with the farm to be used as a ‘weekender.’

In this scenario, we would give consideration to holding the farm and conducting the farming business in their family trust. This structure would be appropriate in the circumstances, given the following:

  • They have an existing main residence, and therefore the loss of the main residence exemption is not a relevant consideration.

  • They achieve an additional layer of asset protection by holding the asset in their family trust.

  • A family trust is not subject to the non-commercial loss rules, hence it is likely the loss from the farm would be able to offset part of the other income received by the trust.

As you can see, the decision on how to hold your property and also run your farming business really does depend on your circumstances and it is vital you get clear advice before you sign a contract.

What are some common tax considerations?

Get your debt mix right

It’s critical that you take advice in relation to your funding needs and structure before you undertake the transaction. Making the right choices can significantly improve your taxation position.

For example, let's assume you buy a vacant 200 acre farm block for $1m. You intend to build your new main residence on the block, at a cost of $800,000, and the balance of the land will be used in a genuine farming operation.

You sell your house in the city, pay off the loan, and have $800,000 left to put towards the transaction. In this situation, you could use the $800,000 to fund the land purchase, and borrow the remaining $200,000 for the land, along with a further loan for the $800,000 required to build the house. You will then be left with a $1m loan, of which at best only 20% could be tax deductible, being the portion used to fund the land acquisition.

Consider instead if you negotiated with your bank to borrow $1m for the land, and used your cash of $800,000 to build your home. By using this approach, the vast majority of the $1m debt would be tax deductible, significantly improving your tax position.

GST registration

Whilst you are not required to register for GST until your enterprise has annual GST turnover of $75,000 or more, we find most farming businesses will register for GST from inception.

In many cases, it may be many months or even years before the enterprise will generate any income, due to the nature of a primary production business. However given most incur significant commencement costs through purchase of livestock and equipment, it certainly makes sense to be registered for GST.

As an example, if you purchase 10 head of cattle from a GST registered vendor for $11,000 including GST, not being registered for GST will make those cattle 10% dearer as you will need to absorb the cost of the GST. By being registered, you will be able to claim the $1,000 of GST on your next business activity statement (BAS), reducing the cost of the cattle to $10,000.

Fuel tax credits

Fuel tax credits will enable a rebate to be claimed in your business activity statement (BAS) each quarter of up to 42.3 cents per litre of eligible fuel used off road (e.g. in a tractor). The rebate can also apply to petrol used in farm bikes and chain saws for example.

Land tax

Assuming the land is zoned rural, and the dominant use of the land is for primary production activity, then it will be eligible for an exemption from land tax.

In short, if you have acquired your own stock and are actively running a primary production business by 31 December, then you will be eligible for the land tax exemption.

Non-commercial loss rules

Typically in a farming business, the early years are characterised by making losses, particularly if you have borrowed money to acquire the land, and you invest in new capital equipment.

Naturally from a tax perspective, it would be advantageous to be able to offset some of these losses against other taxable income from non-farm sources.

In order to do this, there are a few items to consider.

Firstly, if you are operating the business in a personal name, and the income from other sources is less than $40,000 per annum, you are able to claim your losses against that other income.

Secondly, to be eligible to offset your loss, you must determine if you meet the $250,000 income requirement. This requires your taxable income, plus any reportable fringe benefits, reportable superannuation contributions, and total net investment losses, be less than $250,000 in an income year.

Assuming you meet the $250,000 income requirement, you will need to meet one of four tests to be eligible to claim your loss.

The four tests are as follows:

  1. Assessable Income Test. Your assessable income from the business activity must be at least $20,000. This includes both ordinary income, for example cattle sales, as well as capital gains. If your business started or ceased during the year, you can make a reasonable estimate of your full year income.

  2. Real Property Test. This test is met if the total value of ‘real property’ used in the business is valued at $500,000 or more. Real property includes land, structures such as buildings fixed to the land, but excludes assets mostly used for private purposes. You can use either the reduced cost base or market value to assess this test.

  3. Profits Test. This test requires you to have made a profit from your business activity in three out of the last five years (including the current year).

  4. Other Assets Test. You will pass this test if the value of ‘other assets’ used in the business is at least $100,000. The assets included in the calculation include plant and equipment, trading stock, and leased assets, and their value is their written down value for taxation purposes.

We generally find that most operations will pass the Real Property Test, given the strong value of farming land and the requirement for the farm to be of reasonable scale as mentioned earlier.

Tax deductions

There are some tax deductions that are commonly claimed for primary production business, and also some that are particularly unique to these businesses.

Depreciation

Assuming the business is eligible, the small business entity depreciation regime may be available, as follows:

  • Immediate write off of assets costing less than $150K (until 31 December 2020)

  • Pooling of assets over $150K, where you claim 15% depreciation on year of purchase and 30% of the remaining written down value each year

Please note the Government has announced in the budget that businesses will be entitled to the immediate write off of eligible capital assets acquired from 6 October 2020 and first used and installed by 30 June 2022. This applies to new assets and costs of improvements to existing eligible assets in the first year of use.

Businesses with an aggregated turnover of less than $50m will be able to expense the cost of second-hand assets purchased. Further, businesses with an aggregated annual turnover of between $50m and $500m can still deduct the full cost of eligible second-hand assets costing less than $150,000 if they are purchased by 31 December 2020.

Here’s a list of potential tax deductions for the decline in value of depreciating assets and certain other capital expenditure:

  • Water facilities. You can claim an immediate deduction for expenses incurred on water facilities. Examples of a water facility, are dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.

  • Fencing assets. If you incur expenditure on fencing assets, you claim the full amount in the year you incurred it. Prior to 12 May, 2015, these assets were required to be depreciated.

  • Fodder storage assets. A fodder storage asset is one that is used primarily and principally for the purpose of storing fodder, such as hay, grain, or silage. You can claim a deduction for the decline in value of a fodder storage asset in equal instalments over three income years if acquired prior to 18 August, 2018. If acquired post this date, an immediate write off can be claimed.

  • Ten-year write-off for electricity connections and telephone lines. You may be able to claim a deduction over 10 years for capital expenditure you incur on connecting mains electricity to land on which a business is carried on for a taxable purpose or upgrading an existing connection to that land, or installing a telephone line on, or extending to, land on which a primary production business is undertaken.

  • Landcare operations. A primary producer can claim a deduction for the following expenses in the year they are incurred:

    • Eradicating or exterminating animal pests from the land.

    • Eradicating, exterminating or destroying plant growth detrimental to the land.

    • Preventing or combating land degradation other than by the use of fences.

    • Erecting fences to keep out animals from areas affected by land degradation to prevent or limit further damage and assist in reclaiming the areas.

    • Constructing drainage works to control salinity or assist in drainage control.

    • Erecting fences to separate different land classes in accordance with an approved land management plan.

    • Constructing a levee or similar improvement.

  • A shelterbelt is a line of trees or shrubs planted to protect an area from fierce weather. Shelterbelts can be used to:

    • Protect crops and livestock

    • Improve biodiversity

    • Prevent or fight land degradation – for example, soil erosion or degradation of vegetation

If you establish a shelterbelt on land on which you conduct a primary production business, you can claim:

  • An immediate deduction for any costs for new fencing and reticulation (such as, pipes, fittings, sprinklers, pumps and bores).

  • A deduction for the costs of site preparation, chemicals and trees, if the shelterbelt is established mainly to prevent or fight land degradation.

If you recoup any of the expenditure that you can claim as a deduction (for example, under a government assistance program), include that amount in your assessable income.

Additional factors to consider

If you’re aware of the hidden risks that come with rural property, you can avoid them or at least mitigate the risks by doing your due diligence and being well-prepared. Vendors may not always be required by law to disclose every risk, but you can contact the NSW Department of Primary Industries, your conveyancer and the local council for any questions.

Access to the property

Ensure that you have both the legal and the practical access to the property. For example, the survey plan may indicate a road to access the property, but this may not exist in reality. If you do find any issues, you may need to negotiate an easement with one of your neighbours to gain access.

Enclosure permits

Does the property have a Crown road running through it? An enclosure permit allows the owner to enclose a Crown road within the property by fencing it. Contact the NSW Department of Primary Industries for any questions.

Native vegetation

The Native Vegetation Act sets out what you can and can’t do with native vegetation on your property, such as clearing and farming. If you intend to farm the land, you’ll need to first confirm there are any issues that may prevent you going ahead.

Mining

The property may be subject to mining licences or applications. Ensure you do your due diligence on this before purchase.

Noxious weeds

Noxious weeds can cause major problems to your aspirations to operate a farm. Make sure you do your research to see if the property has any problems with noxious weeds and has any weed notices. Eradicating these can be costly.

Pests and diseases

If you plan to farm crops or livestock, you need to be across any potential pests or diseases that may be present. Some rural areas are designated as disease or pest management zones, so always check with your conveyancer or local council to get the facts.

Easements

An easement gives someone the legal right to use your land for a specific purpose, even though you have the legal property title. A law firm or conveyancer can check this for you and outline some possible next steps.

Sewerage and water supply

Unlike town or the city, don’t assume that any rural property will be connected to a central sewerage system or town water supply. Most rural property relies on septic tanks or other systems.

Checklist

The following comprehensive checklist from the NSW Local Land Services is fantastic and provides a detailed summary of items to consider before buying your dream farm. But it is not intended to replace you seeking legal advice.

Property history

  • Do you know the history of the property? Request a property search from Local Land Services to ensure there are no outstanding rates, levies or restrictions due to chemical residues, plant or animal diseases on the property.

  • What stock did the previous owner have?

  • Did they sow pastures and use fertilisers?

  • Are there any contaminated sites on the property such as cattle dips or rubbish dumps needing remediation?

  • Have you requested a sheep and/or cattle health declaration from the vendor? (This can tell you important information about livestock diseases that might affect the ongoing use of the land.)

  • Are there any derelict mine shafts on the property? If so, are they fenced to ensure your safety?

What is on the property and nearby?

  • Are there any structures on the property and if so, what condition are they in?

  • Are there pest animals (e.g. rabbits, foxes) on the property?

  • Are the fences in good repair and suitable for confining stock if that is part of your plan?

  • Are there threatened species of flora and fauna on or near the property?

  • Are all required services provided to the property? If not, can they be provided economically? Or is it an area that will always have limited services? Services include phone, gas, water, sewer, internet and electricity.

  • Are there existing or proposed adjacent land uses that will affect your enjoyment of the property? For example, are there legitimate rural uses nearby such as agriculture, quarries, mines and forestry that produce dust, odours or noise?

Ask your local council or authority if there are:

  • Any development applications current for the nearby area?

  • Any restrictions on obtaining approval to build a house or other buildings on your block, or to develop certain desired land uses?

  • Other developments that have been approved but not commenced or were built without approval?

  • Any potential constraints under the Section 10.7 Certificate from the local council? (Ask your council to view this certificate and discuss with your conveyancer or solicitor.)

  • Is the land prone to flood or bushfire? Will you need to undertake any management activities to minimise these impacts? It may be more expensive to build and get insurance on flood or fire-prone land.

  • Are there any rights-of-carriageway or other easements on the property which need to be maintained and/or which may allow neighbours access?

  • Are there any covenants, management plans or agreements on the property that protect certain areas?

  • Are there any outstanding weeds notices on the property?

Land zoning and regulations

  • Do you know what the land is zoned and what agency or local government is responsible for activities such as native vegetation management in that zoning? For instance, is it your local council or Local Land Services? Local Land Services can help you with a property search.

  • Does the zoning of the land allow your proposed use, or will you need to apply for a change of land use or any other permit?

  • If there is no existing dwelling and you want one, does the land have a dwelling entitlement?

  • If you plan to buy a property in far western NSW are you aware there are special conditions apply to land in the Western Division?

Your plans for the property

  • Are you buying the property more for lifestyle reasons? (Many of the regulations and responsibilities of owning a rural property apply across the board, regardless of whether it is a lifestyle block or a productive enterprise.)

  • Do you plan to improve the property and receive an income from it? Have you done a cost‑benefit analysis? For instance, how many stock do you need to carry in order to be viable and can the property support that?

  • Is the activity you plan for the property suited to the landscape and capability of the land?

  • Is the activity you plan for the property likely to clash with those of your neighbours?

  • Do you know the regulations and conditions for building dams or that you may need approval for sinking bores? Do you know that digging near a watercourse may require a permit?

  • Is there enough water of suitable quality to sustain the activity that you have in mind?

  • Is the soil fertile and the pH appropriate for growing pasture, crops and any other produce that you want to grow? Are there any salinity or erosion issues?

  • Are there any existing conservation agreements or covenants, vegetation management plans such as Property Vegetation Plans (PVPs), Land Management Code Certificates and Private Native Forestry Plans or conditions of consent over part/s of the property? These may require you to undertake specified management actions, or limit the land use on part of the property?

  • Are you aware that in most instances you require approval to remove native vegetation? How might this affect your proposed activities?

  • Are there good quality pastures? Are they dominated by native or introduced species?

  • Is there enough shade and water for stock?

  • Will you be living on the property? If not, how often do you plan to be there? Have you thought about how quickly you could attend to situations that might arise?

  • Do you understand the term General Biosecurity Duty?

  • What weeds are on the property? Are any on State and Regional priority weed lists?

  • Will the amount of time and money required to control weeds, erosion and pest animals be excessive? After considering all these questions, will the property provide the rural lifestyle that you are looking for?

Conclusion

Buying a farm, leaving the city and living the dream, can be a great decision and a very rewarding experience. However, like with any major decision, it’s important to get the facts and to do the research.

There are many things to consider before jumping in and buying your dream rural property. They include the ideal business structure, the optimal mix of debt for funding, GST registration, tax deductions, property access, enclosure permits, noxious weeds, pests, water supply and more.

To make sure that your investment is sound, you need professional advice to help you navigate the complex process that comes with buying rural property. We recommend seeking out a professional accountant, conveyancer and speaking with the local council.

If you would like some personalised help with your specific financial situation and rural property, please book in a Free Business Health Check with one of our qualified accountants.