Understanding share dairy farming
Share dairy farming is the term used within the dairy industry to describe the arrangement where two parties, the farm owner and a ‘share farmer’, operate a dairy farm business together.
Generally each party provides different, but complementary, resources to the share farming arrangement in the form of land, machinery, equipment, livestock and labour.
As the name suggests, the arrangement involves sharing. Income is shared and there is a degree of cost sharing with each party being recognised as an individual entity while working together on the one farm. Also shared is risks, responsibilities, skills and control. Both parties will bring assets (land, stock, machinery) to the arrangement and there should be the potential for the share farmer to increase their assets. If the share farmer brings minimal assets, such as a bike, ute and a handful of stock, it will be difficult for them to qualify as share farmers without substantial opportunity to grow their assets.
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Seek help in developing an arrangement
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Discussing and developing a share farming arrangement is best done with the help of a consultant or dairy adviser. Once an agreement has been reached then get the financial and legal aspects checked by an accountant and solicitor.
Your state dairy farming organisation can also provide advice on share farming arrangements:
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Unlike in New Zealand, there is no specific legislation about share farming in Australia, so these arrangements which are such an important model of farming in our industry, must comply with the laws about independent contractors. The information presented here helps farmers (owners and share farmers) understand the options for putting together an effective agreement that complies with the relevant legislation.
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There is no such thing as a standard share farming agreement and there are lots of things that you need to remember to include when putting together an agreement.
This share dairy farming agreement checklist can be used to make sure you have covered everything and as a guide for checking your current agreement or the basis for creating a new agreement. |
A successful share farming arrangement can realise the potential of individual resources, resulting in a profitable dairy business for each party. However, it is not just joint provision of the right assets that leads to success. It is important that share farming participants recognise and respect the skills, as well as the assets, brought by the ‘people’ entering the share arrangements.
Share farming arrangements invariably involve a shift in ‘control’ within the business compared with an owner-operated dairy farm. If a share farming agreement is to be successful it is important that the parties entering into the agreement identify and agree on the areas that each will control.
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'Control' is an important distinction - share farmer or employee?
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The issue of ‘control’ is important. If the share farmer has no control over the way work is performed, they are likely to be considered at law to be employees rather than share farmers regardless of whether they are called share farmers. This means that the entitlements and responsibilities of an employment relationship will apply. |
Parties considering a share farming agreement for the first time need to be aware that it involves risk. For a farm owner, the risk is generally in the area of management. Will the share farmer have the management skills expected to fulfil his/her part of the arrangement? For a newly engaged share farmer, the risk is related to seasons, prices of inputs and outputs, and his/her ability to provide the necessary skills to reach stated targets.
Both farm owners and share farmers need to understand the risks of operating within a share farming agreement and understand the risk exposure. The level of risk varies for each party as the level of share increases. The greater the capital invested, the greater the risk exposure to milk price, production and seasonal variation.
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Why consider a share farming arrangement?
Some valid reasons why a farm owner might enter a share farming arrangement are:
- he/she wants to invest in land assets that are utilised profitably and increase in capital value, while needing the management skills, stock and plant provided by another party;
- he/she owns all the assets required, but wants less involvement in the day-to-day operation and management of a dairy business, while wanting continued involvement in management direction;
- a step towards farm succession.
It is not good business practice for an owner to engage a share farmer to avoid employment compliance issues (such as superannuation, taxation or workers compensation obligations) or to extract long hours, including overtime, from someone who is essentially an employee but is called a share farmer.
Some valid reasons for someone wanting to become a share farmer are:
- an improved ability to grow net worth through increased operating profit and asset creation;
- greater job satisfaction through additional responsibility and direct gain from the outcomes of business decisions;
- an opportunity for significant involvement in a dairy business for someone with the skills but limited access to the capital required to own a dairy business;
- a gradual path in terms of skills acquisition.
It is not a good reason to become a share farmer ‘to split tax’, ‘to get a free house’ or to avoid having the boss looking over your shoulder.
Traditionally, there has been a pathway from share farming to farm ownership. As dairy land values continue to rise, this may become increasingly difficult. Nevertheless, a well-planned share farming arrangement can provide substantial potential for asset growth by share farmers. In addition, many purchasers of dairy land will require the provision of a high level of management expertise that can be supplied by a share farmer.
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What is the difference between an employee and a share farmer?
It is essential to determine whether the person you are seeking to engage is a true share farmer or an employee at common law. The distinction is important as the law imposes different rights and obligations on those who engage independent contractors and those who engage employees. An employer is required by law to provide benefits such as annual leave, personal leave and long service leave, whereas there is no such obligation on the principal in a contract to provide these benefits to an independent contractor.
The common law defines an independent contractor (and a share farmer is a type of independent contractor) as a person who works under a commercial contract or a contract for services. The independent contractor can operate as an individual or through a partnership, company or trust.
An employee is defined as a person who works under an employment contract or a contract of service. A company or partnership cannot be an employee.
At common law, if one party can control the way the work is performed, where and when it is performed and by whom then the contract is more than likely an employment contract.
Over time the courts have developed a number of tests which can be used to help determine what it means to be in control and therefore whether the worker is an employee or contractor at common law. No one test determines whether control exists. Rather, the courts have developed a process which weighs up all of these tests to decide if on balance control exists or does not exist. If the contractor has no ability to “control” it is more than likely that at law the person will be an employee.
A true share farmer will:
- have the ability to make management decisions;
- be able to delegate or employ others to do some or all of the work;
- be responsible for their mistakes and be required to rectify them at their own cost;
- decide how work will be performed and when;
- be responsible for a proportion of the costs of the business;
- bring assets such as machinery, mobile plant and stock to the arrangement;
- have the ability to increase equity as a result of the work he or she performs under the share farming agreement.
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Different types of share farming arrangements
There is no such thing as a ‘typical’ share farming arrangement.
Historically, share farming arrangements in the dairy industry developed during the era when there was more uniformity in farm production systems. Consequently, the notion of a ‘typical’ arrangement which provided this fair distribution of income and costs was valid.
Industrial relations laws are now more complex than 30 years ago. There is now legislation at a federal level which makes it an offence to engage a person as an independent contractor when they are at law an employee (see sham contracts). There is also specific federal legislation and legislation in some states protecting independent contractors from unfair terms in contracts and providing for such contracts to be reviewed if the remuneration is less than the person would have received as an employee (see unfair contracts).
In addition, today there is a broader range of production systems, with associated variation in income, cost and risk structures. For example, some farms have a greater reliance on and a different attitude to externally sourced feed, leading to totally different income/cost structures than farms with more pasture-reliant systems.
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Two similar farms but different share arrangements
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The Peters have a 200 hectare dairy farm and milk 600 cows. They achieve a production of 580 kg solids per cow, calve three times per year and import 40% of the total feed consumed.
The Reiters own the neighbouring property which is also approximately 200 hectares. They also milk 600 cows but their production is 320 kg of milk solids per cow, they calve once per year and import only 10% of the total feed consumed.
While both farms milk 600 cows on similar areas, they are very different businesses and have agreed to different share arrangements to achieve an equitable outcome for both parties. |
While there is no such thing as a ‘typical’ share farming arrangement due to the range of farm production systems, the majority fall into one of the following categories:
- Low level of share farmer control and asset provision, receiving 5-25% of income with limited or no cost sharing.
- Medium level of share farmer control and asset provision, receiving 25-40% of income with more substantial cost sharing and control. In these arrangements the share farmer may provide some plant or livestock.
- Higher level of share farmer control and substantial asset provision (herd, mobile plant or land), receiving 40-60% of income and sharing in a large proportion of costs.
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If a share farmer has minimal control they may be an employee
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Beware of arrangements which give the share farmer minimal control and are likely to be classified as employment contracts. If the share farmer is engaged to provide management and labour skills but does not wish to share in the variability of costs and they agree on a low percentage share, they should be engaged as employees who are paid on an incentive basis. The law says that if the person is in reality only selling their labour they should not lose the protections of employment laws. For more information go to What is the difference between an employee and a share farmer? |
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Ingredients of a successful arrangement
There are many very successful, long-term share farming arrangements that suit both parties and value-add to each party’s skills and resources.
The success of the arrangement involves specialist skills, which some people have naturally and others need to learn.
The components that contribute to success include:
- the potential for providing reasonable financial returns for each party, which is reviewed prior to commencement using actual data and reviewed during the agreement period;
- compatible philosophies on ‘how to dairy farm’ – this can be established in early discussions and reinforced when establishing an annual budget that forms the basis of the income and cost sharing;
- both parties’ personalities are suited to a share arrangement – communication, empathy and mutual respect are integral components of success;
- extremely clear income and cost sharing arrangements that are frequently discussed, preferably at regular monthly meetings;
- the issue of ‘control’ is specifically discussed and individual roles are clarified and acknowledged by both parties in advance of any decision making;
- both parties agree to methods of communication - for example when and how regular meetings will occur, and how owners and share farmers will interact between times (just drop-in or phone prior to catching up);
- a written agreement – which will not overcome shortcomings in any of the above, but is likely to expose them and, where possible, help avoid conflict during and at the end of the agreement, or even identify incompatibility before an agreement commences.
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Share farming ‘hot spots’
The following areas historically seem to create conflict within share farming situations and need to be clarified at the commencement of any arrangement:
- longer term goals and direction of the farm business, eg which dairy company to supply and decisions on stocking rate;
- general farm presentation and standards;
- responsibility for decision making around daily activities, eg what grain mix to feed, which cows to cull, which calves to keep, which bulls to choose, feeding and grazing decisions, when to irrigate;
- expectations about labour provision, especially if the share farmers are a ‘couple’;
- expectation on the quality of herd records;
- ownership and payment issues for fodder and fertiliser (also needs to be clarified for termination);
- dealing with stock and machinery upon termination of the agreement.
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Setting up a share farming arrangement
Share farming arrangements are often based on the percentage of income received and the costs paid by each party (e.g. 50/50 share) and, importantly, the operating profit (bottom line) and the related return on assets to each party. Discussing and developing a share farming arrangement is best done with the help of a consultant or dairy adviser. Once an agreement has been reached then get the financial and legal aspects checked by an accountant and solicitor.
In the formulation of any share farming agreement some basic principles should be followed.
- Make sure at the start that both parties share a common picture of the farm’s future.
The discussion that occurs between an owner and a share farmer in developing a share arrangement often tests the common understanding about the direction of the farm business and, hence, the potential success of the arrangement.
- Make sure that the income and cost splitting arrangement provides a fair and reasonable outcome for both parties.
There must be a fair distribution of income and costs between the owner and share farmer so that they each obtain a fair and reasonable return on the resources they are providing and the risks they are taking. Other benefits such as the provision of a house, utilities, calves to rear for thier own use etc should be valued in the agreement discussions.
- Calculate anticipated returns jointly.
Having discussed a possible splitting of income and costs, based on what is being provided by both parties, both parties need to calculate jointly the anticipated returns to each party (not just themselves) using long-term milk and supplement prices, and with an expectation of average seasonal conditions.
- Model the effect of extremes in price and seasonal variation.
Once both parties have examined the potential average returns (if possible from historical actual data), it is important to model the effect of extremes in price and seasonal conditions to get an indication of variation in returns to each party. It is common for disputes regarding the ‘fairness’ of agreements to arise in difficult years due to the financial pressure on both parties; if the fairness is established at the start it reduces the chance of disputes in difficult years.
- Ensure returns on labour and capital are fair.
- Calculate returns on each party’s investment fairly.
The return to a share farmer for labour should be higher than the amount the share farmer could receive as an employee, since this amount may include superannuation, holidays, personal leave and, in some cases, workers compensation. Some return may be in growthin equity rather than cash return.
The debt level and the annual debt servicing by either party have no relevance on the formulation of a fair share arrangement. It must be based on the total value and type of capital and labour value that each party provides in the arrangement.
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Income and cost sharing
The income and cost sharing in a share farming arrangement will depend upon the specific details of each farm business and must generate a return that is equitable in relation to each party’s contribution.
Some general recommendations are:
- Sharing of direct feed costs should be on the same basis as any income sharing to ensure sensible and equitable feeding decisions.
- Costs associated with direct spending on an asset owned by one party could be controlled and paid by the owner of the asset. For example, a share farmer who owns all the mobile plant on the farm could pay all the repairs and maintenance on the mobile plant, while the owner pays the repairs and maintenance on the fixed plant and the farm. A share farmer who owns all the stock could pay the herd costs associated with the herd.
- When considering a share with a low level of control by a share farmer then the share should be simple with few shared expenses. This also means that termination and commencement can be reasonably simple.
- In the situation where one party is in total control of one area of the business, then it may be sensible to apportion most of the costs in that area to them and balance this against apportionment elsewhere in the arrangement. For example, if the share farmer manages the dairy, then shed costs could be apportioned accordingly.
- Livestock ownership can create additional pressure on a share farmer/owner relationship when both parties have individually owned and identified stock in the herd. In this situation it may be preferable to have all stock valued at commencement and make joint equity the basis for livestock ownership, rather than individual animals.
- Each party should seek independent legal and financial advice about compliance issues, such as workers compensation, superannuation, taxation, including fringe benefits tax and GST.
- Cash flow and tax planning are essential, particularly at commencement, due to the lag between costs incurred and income received.
- All the costs associated with the operation of a dairy farm should be discussed and any cost sharing and the reasons behind the share allocation should be logical, sensible and clear to both parties.
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Finance
The individual financial positions of both parties are important when considering entering a share farming agreement. However, the debt level and the annual debt servicing by either party have no relevance on the formulation of a fair share arrangement.
Owners must ensure that their financial position is adequate to allow them to engage a share farmer.
A share farmer who is required to provide assets must decide if he/she can afford the debt servicing and the lag in cash flow at commencement.
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Debt and cash flow
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Care should be taken with debt servicing and cash flow as it is relatively easy to access finance on equipment with short repayment periods. If a share farmer has borrowed all the equity for tractors, motorbikes, utes and cows, debt servicing creates substantial financial pressure on the share farmer making it difficult to meet production costs. |
Financial management in these early stages is a critical skill, which a share farmer must acquire if growth in net assets is to be achieved.
Traditional banks usually lend to share farmers with established skills in dairy farming to purchase herds. This means that the herd ownership step is difficult and results in most share farmers spending an initial period providing labour and management skills until enough equity has been saved to purchase stock. There are institutions that offer ‘lease purchase’ arrangements to secure herds for share farmers.
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Developing a written agreement
Developing a share farming aggreement is a multistep process. It usually starts with both parties sitting with an advisor who works through with the parties (or either party), what it is they are actually trying to achieve or to find in an arrangement. For example, this may be to find someone to take the day-to-day management issues off the owner and yet leave the season-by-season decisions to be made by both parties. This starts the process of determining the level of control that the owner wants to hand over to the share farmer, and starts to form the basis of the share farm agreement and cost/income sharing.
An important part of developing the share farming agreement is to establish some production and budget targets based on anticipated milk and input prices and historical data. This can then be reviewed during and at the end of the first year in an open discussion regarding the overall business performance and whether the returns anticipated by each party were achieved. As a dairy business changes, the share arrangements need to be reviewed to ensure that the share is still equitable to both parties.
An agreement is then drafted and reviewed by the three parties (owner, share farmer and advisor) and changes are made accordingly;
Then an accountant may be consulted by either party in order to get the “financials” right for each party;
Then the agreement may be ratified by a solicitor, or it may remain a memorandum of understanding between both parties.
The aim is for the agreement to have fairness and relevance, and then be checked off legally and financially.
The more detailed the discussions between the two parties and the incorporation of the discussions into a written document, the greater the chance of success. In addition, if the arrangement is not successful, a written document will assist with the termination and exit procedure. It is important to appreciate that two parties jointly signing a milk supply arrangement does not constitute a share farming agreement. It is simply the income share arrangement.
The production of an agreement may seem a tedious process, but it needs time and thought to minimise the chance of misunderstandings and to test the relationship.
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'Standard agreements' may no longer be relevant
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There are ‘standard agreements’ that are circulating in the dairy industry based on traditional share arrangements. Treat these with caution since they may be of limited relevance in today’s dairy industry. |
The share farming agreement should be in two parts.
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The first part should contain standard clauses which should be part of every agreement or contract.
The second part should contain the non-standard schedules, which will vary depending on what the parties have agreed.
There are a series of model clauses and schedules in this share dairy farming agreement checklist that can be used for this purpose. |
New South Wales Agricultural Tenancies Act
The New South Wales Agricultural Tenancies Act requires that share farming agreements be in writing. It also provides a mechanism for settling disputes that may arise during the term of the agreement and has specific notice requirements for termination. If the agreement is for a fixed term no notice is required. If your share farming agreement does not have a fixed termination date, but rolls on from year to year, the notice period for termination is 6 months unless the agreement specifically states otherwise. It is recommended that all agreements be for a fixed term and be renewed appropriately at the end of the term.
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Renewal and renegotiation of the agreement
When share farming agreements need to be renegotiated, it is useful for both parties to examine all aspects of the past agreement closely and consider how the agreement has operated.
There are two key issues which pertain to a successful share farming agreement. These are the degree to which the share farmer is able to improve the profitability of the dairy operation and the degree to which the share farmer is able to fulfil his/her stewardship role in maintaining the amenity and asset value of the land resource. If both issues are attended to as a normal part of farming operations, the business arrangement between both parties has a solid foundation.
However, the maintenance of the amenity and asset value of a land resource is often at odds with the maintenance of profit.
Clearly, profit provides a motivation and incentive for share farmers to perform. The farm owner however, usually focuses on both assets and profit. This difference in focus ought to be discussed regularly between the parties, and certainly upon renewal of the agreement, to strike an acceptable compromise.
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Here is a checklist to guide negotiations between the parties renewing an existing share farming agreement.
It is suggested that the land owner and the share farmer complete the checklist independently and then exchange copies. Allow a week to think about it and then meet to discuss the issues and options. |
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Legal obligations relevant to engagement of a share farmer
Residential tenancy laws
Residential tenancy laws lay down notice periods for ending the tenancy, whether bonds can be required and how much can be charged, rules regarding repairs and inspection, and agreements with specific terms. Breaches of these laws attract fines.
Whilst residential tenancy laws can protect both the tenant and the landlord, the notice periods for ending the tenancy can be problematic when accommodation has been part of a package. Notice periods will continue to apply which can be up to 60 days.
In Western Australia, New South Wales, South Australia and Tasmania residential tenancy laws do not usually apply where the tenancy is not ‘for consideration’ or 'for value' which means that no rent is paid for the accommodation.
In Victoria and Queensland residential tenancy laws may apply to accommodation on farms where the accommodation is not a part of the wider lease of the farming property.
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Superannuation
The federal Superannuation Guarantee legislation requires all employers to make superannuation contributions, currently 9% of ordinary time earnings, for all employees.
Under this legislation, some independent contractors are taken to be employees and the contract principal (the owner) is therefore required to pay superannuation contributions, regardless of whether the common law ‘control test’ has been met.
If all three of the following criteria apply to the contractor then the contractor will be regarded as an employee for superannuation laws:
- the person is paid wholly or principally for their labour and skills (the contract can be for labour and supply of materials or goods but the superannuation laws will apply if the labour component is the main part of the contract);
- the person is required by the contract to perform the work personally and cannot delegate the task to other workers, and
- the person is not paid to produce a result.
If the independent contractor trades as a company, a trust or partnership, the contract will not be regarded as a contract for a person’s labour or skills under the superannuation laws and there will be no liability for superannuation payments.
If the test applies to the person you have engaged, you must pay superannuation contributions at the rate of 9% of the labour component of the contract to a complying superannuation fund.
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Seek advice on superannuation
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The penalties for breach of superannuation requirements are severe and professional advice should be obtained if you have any doubts about whether the law applies. |
What about the contractor’s employees and superannuation?
Where a contractor employs workers to do the contract work, it can be difficult to decide whether you or the contractor will be taken to be the employer and therefore liable for superannuation contributions. To avoid possible penalties, it is suggested that you insist that the contractor notify the relevant superannuation fund that the contributions for these employees are on your behalf as well as on the contractor’s behalf. It does not cost the contractor any more and protects you.
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Workers compensation
Workers compensation is the responsibility of state and territory governments. Every state and territory has its own legislation which has different rules as to who is responsible to take out insurance cover for workers compensation.
The responsibility for workers compensation depends upon how the term ‘worker’ is defined by the relevant state or territory legislation.
In some cases this will mean that a contractor (or share farmer) which meets the common law ‘control test’ will nevertheless be regarded as a ‘worker’ (or employee) and the contract principal (the owner) as an employer and therefore responsible and liable under workers compensation laws.
While some states (Victoria and Queensland) have special laws about share farmers this does not mean that other state laws about independent contractors do not apply to share farmers.
Farmers intending to enter into a share farming arrangement should check with their state or territory workers compensation authority before work begins.
Read a summary of how the laws apply to farmers employing contractors for farm work in your state:
Note that these laws may change. Before entering into any contracts check for changes to this legislation by going to your state or territory workers compensation authority.
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Unfair contracts
Federal Independent Contractors Act
The Independent Contractors Act 2006 (Cwlth) commenced on 1 March 2007. The main impact of this legislation for farmers is the creation of federal unfair contracts laws which set up a new system for challenging the terms of work contracts.
The Act uses a definition of ‘independent contractor’ which is the same as the common law ‘control test’.
The Act also overrides state industrial laws (this does not include workers compensation laws, OH&S laws and discrimination laws) which take some types of contractors to be employees regardless of whether the common law ‘control test’ applies. However, these changes are not relevant to the farming industry.
The Independent Contractors Act, establishes a process in the federal Magistrates Court to review, vary and/or set aside contracts which are found to be unfair. These laws apply if at least one of the parties to the contract trades as a company and the contract is for performance of work, other than domestic or private work.
However, independent contractors which trade as companies and employ others to do the work, cannot take advantage of the federal unfair contracts laws. To be eligible, the contract must relate to work being done by working directors or family members of directors only.
Independent contractors who operate as sole traders can take advantage of the laws only if the contract principal (the other party) trades as a company.
The Independent Contractors Act also applies if:
- at least one party is a resident in a territory;
- at least one party is a company that is registered in a territory;
- the work to be performed is in a territory;
- the contract is entered into in a territory; or
- a party to the contract is a Commonwealth authority.
In deciding whether a contract is unfair the federal Magistrates Court must consider the following:
- the relative bargaining strengths of the parties to the contract;
- any undue influence, pressure or unfair tactics which may have been used;
- whether the payment to the independent contractor is less than an employee doing the same work would have received; and
- any other relevant matters
Note: If the federal unfair contracts laws apply, contractors will not be able to use state and territory unfair contracts laws.
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Unfair contracts in New South Wales
In New South Wales the Industrial Relations Act 1996 provides for the New South Wales Industrial Relations Commission to review independent contracts (or contracts for services).
The Industrial Relations Commission has the power to amend a contract which has been found to be unfair and also to declare that the contract is not legally binding either completely or in part.
Importantly, the grounds for the Industrial Relations Commission finding that a contract is unfair include:
- that the total remuneration is less than a person would receive as an employee;
- that the contract avoids or is designed to avoid the provisions of an industrial instrument (an award or industrial law.).
The Industrial Relations Commission can find the contract to be unfair at the time it was made or later due to the conduct of the parties and can order monetary compensation to be paid.
An application may be made provided the applicant does not trade as a company and provided the remuneration under the contract is less than $200,000.00 per year.
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Unfair contracts in Queensland
In Queensland the Industrial Relations Act 1999 provides for the Queensland Industrial Relations Commission to review independent Contracts (or contracts for services).
The Industrial Relations Commission has the power to amend a contract which has been found to be unfair and also to declare that the contract is not legally binding either completely or in part.
Importantly, the grounds for the Industrial Relations Commission finding that a contract is unfair include the following:
- that the total remuneration is less than a person would receive as an employee;
- that the contract avoids or is designed to avoid the provisions of an industrial instrument (an award or industrial law.)
The Industrial Relations Commission can review any contract provided the remuneration is less than $106,400.00.
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Sham contracts
The federal Fair Work Act prevents employers from engaging employees as contractors just to avoid paying employee entitlements. These are called ‘sham contracts’.
Penalties of up to $33,000 apply if a person:
- dismisses an employee for the sole or main purpose of engaging them as an independent contractor;
- represents an employment relationship as independent contracting; or
- makes a false statement for the purpose of influencing or persuading an individual to enter into an independent contract.
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Illegal workers
Farmers engaging contractors to work on the farm should be aware of the illegal workers laws and how to check work rights.
Farmers can be liable in cases where there is an independent contracting arrangement. In addition, if a contractor does not meet the common law ‘control test’, any workers brought to their property to work with the ‘contractor’ could be taken to be the farmer’s employees. If these employees are illegal workers the farmer could face criminal charges for employing them.
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