Once an employee has a good reputation within the dairy industry, he or she may to be offered a share farming arrangement. Some valid reasons for someone wanting to become a share farmer are:
- an improved ability to grow net worth through profit share and asset purchase;
- 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;
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.
A true share farmer operates as an independent contractor rather than an employee, so different laws apply.
In Australia, (unlike New Zealand) there is no such thing as a ‘Standard Share Farming Agreement’. There are lots of things to take into account and information to help you on this site.
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. Also, many investors in dairy land will need the high level of management expertise on offer by a share farmer.
Staff retention – everyone can be a winner
WEST Gippsland, Victoria, dairy farmers Noel and Ann Campbell have employed staff for the past 22 years. The Campbells have learnt that everyone can win when employees stay for the long term, making it well worth the effort involved in achieving a successful working relationship.
“Having long-term staff is really important to us,” Mr Campbell said. “It is the key to so many things that enable our business and family to thrive: milk quality, product security, continuity of operations and our ability to leave the farm, knowing it is in capable hands.” more>>
It is essential to determine whether you will be engaged as a true share farmer – or are you really an employee? The distinction is important as there are different rights and obligations on those who are engaged as independent contractor to those who are engaged as employees.
An employee is required by law to receive benefits such as annual leave, personal leave, superannuation and long service leave; whereas an independent contractor does not receive these benefits, and is responsible for their own tax and superannuation – read more about the differences
If a share farmer has minimal control, they may be an employee
If the share farmer has no control over the way work is performed, at law they are likely to be considered to be employees rather than share farmers regardless of whether they are called share farmers. This means that your employee entitlements and responsibilities will still apply, e.g. benefits such as annual leave, personal leave and long service leave.
Paying a person a share of the milk income does not make the person a share farmer. You will continue to be an employee unless you have some control of the farm business, contribute significant capital or assets and have a choice in the way the business is operated.
Employees covered by the award must be paid at or above the award rates of pay and other entitlements, including superannuation.
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, therefore, 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 their labour, 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 their own use, etc. should be valued in the agreement discussions.
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 must cover superannuation, holidays, personal leave and, in some cases, workers compensation. Some return may be in growth in assets, rather than a cash return.
Calculate anticipated returns jointly
Having discussed a possible splitting of income and costs, based on what is being provided by both parties, you both need to calculate jointly the anticipated returns to each party (not just yourself) 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.
Seek help in developing an arrangement
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.
Historically, the following areas can create problems within share farming situations and need to be agreed on at the commencement of an 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;
- dealing with stock, fodder, fertiliser and machinery upon termination of the agreement.
Discussing and developing a share farming arrangement is best done with the help of a consultant or dairy adviser.