A NEW LOOK AT SHARE DAIRY FARMING WestVic Dairy, Thursday 18 th September 2014

Share farming is a key part of our dairy industry. 17% of farms in Australia are run under share farming arrangements and it is an important path to wealth creation and farm ownership. % Share farming arrangements by region Source: NDFS (about 1000 farms each year)

But share farming arrangements have been changing significantly over the last few years. Many types of arrangements exist in the industry, with some uncertainty about their legal status. GippsDairy requested some work to clarify the position around share dairy farming arrangements for the whole industry.

Looked at current share farming resources and recent review from NZ Detailed assessment of 31 share farming arrangements from 6 regions. A legal opinion on these profiles was provided by the legal members of the team A Model Code of Practice was drafted and resources refreshed and built.

What do Australian workplace laws say about share farming? There is no case law which defines a share farmer It is the industry view that share farming is a type of independent contracting rather than employment The laws about independent contracting are therefore relevant – the “control test” - “can the person be said to be running their own business?” Industry determined that it was necessary to develop guidance tools for farmers to assist with compliance – Model Code of Practice The Model Code of Practice builds on the relevant aspects of the “control test”

The ‘control test’ Running own business/creating goodwill Hired & paid to do a particular task/job Can decide how & when to perform the work so long as the job gets done Can reject work if they wish Responsible for mistakes / fix at own expense Can delegate so long as the job gets done Provides their own tools and machinery Works for other people as well as you Paid by invoice not wages/salary – uses systems and standard terms of trade which businesses commonly use Contract price was negotiated commercially

The true share farmer will: Be responsible for a fair proportion of the costs of the business Bring assets or have ability to increase assets Have ability to increase wealth - over and above wages Have ability to make and actually make management decisions Be able to delegate if necessary Ne responsible for mistakes and rectification at own cost Determine how some of the work is performed and when NB fairness to both parties is vital

Share dairy farming in Australia Model Code of Practice The industry-agreed approach to building successful share dairy farming arrangements Is the arrangement fair and affordable? Tool [1] Calculator Is it share farming from a legal perspective? Tool [2] Test Guide What should the parties discuss? Tool [3] Checklist What should be in the written agreement? Tool [4] Agreement

 CODE An overview of features of fair and equitable arrangements and relevant Australian workplace laws.

 TOOL 1: to check whether enough income can be generated by the farm to make share farming a feasible option.

 TOOL 2: a guide to ‘scoring’ the likely legal status of an arrangement. Four main characteristics establish the legal case for a share farming arrangement (ie independent contracting vs employment relationship). i.Assets contributed by the Share Farmer ii.Control of operational decisions by the Share Farmer iii.Exposure to financial risk by the Share Farmer iv.Opportunity to accumulate wealth by the Share Farmer (over and above wages)

$ value Land0 Water0 Livestock Mobile plant60000 Fixed plant not in land value0 Working capital40000 TOTAL $ VALUE $ 300,000 Assets contributed by the Share Farmer SCORE $<$20,000$40,000$60,000$80,000$100,000$150,000$200,000$250,000$300,000>$350,000 Score

% decision-making Production system for the farm (eg high or low input)40 Cow numbers at peak (target under the arrangement)50 Cow numbers day-to-day (eg result of drying off decisions)90 Culling 90 Pasture management - home grown feed 90 Paddock rotations 90 Fertiliser choice and application 50 Irrigation - seasonal policy 40 Irrigation - frequency in season 90 Supplementary feed - day-to-day 90 Staff - assigning and directing tasks 100 Contractors - assigning and directing tasks 90 ESTIMATE % CONTROL 76 Control of operational decisions by the Share Farmer SCORE %<10%20%30%40%50%60%70%80%90%100% Score

Exposure to financial risk by the Share Farmer Milk Income Livestock Income15000 Other Farm Income5000 $ Farm Income Herd Costs0 Shed Costs0 Feed Costs0 Overhead Costs18000 $ Farm Working Expenses18000 $ Farm Income $ 160,000 $ Farm Working Expenses $ 18,000 % of Income as Expenses11% SCORE %<5%10%15%20%25%30%35%40%45%>50% Score

Opportunity to accumulate wealth by the Share Farmer (over and above wages) $ Income $ Farm Income$ Non Cash $ Total $ 160,000 $ 15,000 $ 175,000 $ Farm working expenses before any paid labour costs or allowances$ Total $ - $ Net income before labour costs or allowances $ 175,000 Total Farm Production Kg MS135,000kg MS Proportion of operational labour provided by the sharefarmer95% "Better than labour" wealth creation score $ 1.36 SCORE $/KGMS Score

Each factor is scored out of 10 Assets + Control + Financial risk + Wealth = Overall score x/40

Research: Assessment of 20 cases (overall score) compared with a separate legal opinion on likelihood (low, medium or high) of being deemed a share farming arrangement at law. Rating of legal status LOWMEDIUMHIGH Overall score (x/40) < >=25008

Notes If your score is medium or low, seek professional advice to reassess the arrangement This Guide does NOT indicate the fairness or equity of a share farming arrangement, simply if in fact it is a share farming arrangement from a legal perspective

 TOOL 3: a checklist to assist discussion between parties (owner and share farmer) about all the factors that industry experience has shown are important to clarify.

 TOOL 4: a template to help set up a contract.

 TOOL 4: Model Share Dairy Farming Agreement This Agreement has been prepared as a template which can be modified to suit individual circumstances. Key points: The Agreement – Standard Clauses Schedule 1 – Asset Register Schedule 2 – Duties and Obligations Schedule 3 – Property Income and Operating Costs Schedule 4 – Farm Operation and Management Notes – Clarification and Guidelines NB: All sections are important and should be completed.

The draft model code of practice for dairy share farming and tools are available at (search for Share Farming)