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Who Gets The Farm? (Part 3) – First Steps Towards Resolution

Neal Wood

The essential goal of any family law property settlement is to create legal certainty following the end of a relationship. After completing a property settlement each spouse ultimately obtains control of their own separate assets and liabilities with any previous joint property transferred one to the other or otherwise sold and divided.

In family farming situations the extent of the physical, financial and emotional connections created over a long period of time can be particularly difficult to unravel. While at the outset it may seem an insurmountable task, the reality is that it can be done.  An end, not only to the emotional reliance on another person, but the financial reliance on another person is often the most powerful and long lasting outcome of a property settlement.

In this article I wanted to look a bit more practically at how we begin the process of working out who gets the farm and the process for working out the answers to a few relatively simple questions:

  1. What is it and who owns it now?
  2. What is it worth?
  3. Who wants to keep it and is that realistic?
  4. What is the best way to achieve that result?
  5. What are the best legal mechanisms and timing to achieve that result?

What is it and who owns it now?

As lawyers, we start by asking questions of the individuals involved to get a sense of whether the farm is owned by them personally or whether it is owned with other people or in legal entities. While the combinations of legal ownership of farms and rural businesses can be incredibly diverse they normally fall into four broad categories:

  1. Personal ownership and sole traders

The land, the stock and the plant and equipment are owned by the person that purchased or inherited them and they have direct control over it.  Sometimes that person may have a trading or business name but in legal terms it is just the same person.

  1. Partnerships

The land, the stock and the plant and equipment may be owned in the names of two or more people as Partners.  There may be a formal Partnership Agreement or it may be regulated under the Queensland Partnership Act. The partners are usually known to one another and may be any combination of Husband, Wife, Grandparents, adult children and others.  The physical work may be carried out by one or more of the Partners during the year but come tax time, the income from the farm is divided “on paper”  between the partners in a certain way when in reality the income may have been used throughout the year differently.

  1. Private companies

The land, the stock and the plant and equipment may be owned in the name of one or more people as directors of a trading company.  The company has a Constitution that sets out what the company can and cannot do and how it goes about it.  The physical assets are legally owned by the company and appear in the Financial Statements and Balance Sheets of the Company.  The individuals involved are often named as either directors or shareholders (or both).  Normally the directors have day-to-day control of the company and the shareholders share in the profits.  The income from the farm is then reflected in the Financial Statements and Tax Returns as “drawings” by the Directors or as dividends paid to the shareholders.

  1. Discretionary Trusts

The land, the stock and the plant and equipment may be owned in the name of one or more people as trustees of a discretionary trust.  The Trust is regulated by a Trust Deed that sets out details of who controls the trust, who can benefit from the Trust and what the Trust can and cannot do. The person(s) with overall control are the “Principals” or the “Appointors”.  The day to day control is with the Trustee(s).  The other individuals involved are the beneficiaries who may either be paid money from the trust by way of “distributions” or they owe money to the Trust because the income from the business has been paid out to them as a “loan” which must be repaid at some point in the future.

What is it worth?

Once we know what types of structures we are looking for, the next step is to carry out a range of searches to confirm the ‘bare bones’.  Land Title searches show us the names of the legal owners and can show any mortgages secured over the land by the bank.  ASIC searches provide the details of any companies involved including the Directors and Shareholders.  PPSR Searches show whether banks or suppliers are owed money which is secured over stock or plant and equipment.

With the bare bones established we can then look to the documents that will begin to put some meat on the bones.  A review of the Tax Returns, Financial Statements and bank statements can show us all manner of details and give a reasonably good idea of what assets there are, who is in control of them, what debts are owed, and to who, and the sort of income that has been generated over the years.

Depending on how much involvement each party has had we may then need to fill in any gaps by asking others that have access to the missing information we need.  We may need to speak or write to your former spouse or their lawyer and ask them to provide tax returns, financial statements, bank statements, mills tag numbers or receipts going back over a period of years.  We may need to meet with you and your accountant or book keeper and ask them to provide a clearer overview of what has been happening “on the books” over the years compared to what everyone thought has been happening.

Once we have a good idea of how things are owned at the present time we can begin the path towards dividing the assets in a way that achieves the desired outcome.  What that outcome may be really comes down to the individuals and each case is different.

Having worked out what the farm actually is and how it is owned the next step is to begin working out what it is worth.  I will explore the issues about property and business valuations in family law matters next month.

Read Part 4 Here