Family business sector needs tax boost to emerge from COVID-19

It is often said that the Small to Medium-Sized Enterprise (SME) sector is the engine-room of the economy. But it is not an overstatement to say that family business is the very foundation of the global economy.

Did you know that family-owned enterprises account for two-thirds or more of businesses globally, contributing 70 to 90 percent of annual global GDP and 50 to 80 percent of employment?

That being the case, it is surely important that during a global pandemic, any unnecessarily burdensome rules or taxes get looked at carefully, and any possible mechanism to give the sector a welcome boost are considered.

Australia could certainly do with a fresh look at its tax rules regarding the family business sector. In many ways we are an outlier, as the KPMG Private Enterprise Global Family Business Tax Monitor demonstrates.

The key difference between us and most other countries is the tax treatment of succession planning. This is always a thorny subject – transferring a business which has been a lifetime’s passion can be incredibly stressful for anyone, no matter their love for, and trust in, the next generation taking over.

So, it does seem strange that, relative to most of the 54 countries covered in our report, Australian tax law makes it more difficult for this transfer to take place while the original owner is alive. The transition of management control to the next generation should be discussed openly, so that the company can be managed in a stable manner after inheritance.

But in Australia there is a systemic bias that favours families to hold on to wealth until death, rather than having a lifetime ownership transition to next generation. Even where the family wants to transfer the operational reins of the business, sometimes it can be difficult to align at the ownership level because of the potentially significant tax costs in transferring during lifetime. The transfers of family businesses, depending on the business structure, can result in very different outcomes.

While capital gains tax (CGT) kicks in on lifetime transfer, there is no inheritance or gift tax upon death. Compared with our relatively generous CGT rules for main residence properties, the treatment of transfers for succession purposes seems inconsistent.

CGT is not the only troublesome tax issue. Family businesses are subject to income tax, the goods and services tax and multiple employment taxes, among others, and of course taxes often vary between states. Overall, compared to many other countries in our report, Australia has a complex tax system with considerable onus on compliance.

Now would be a good time to review our family business tax system. As with all businesses, the coronavirus has become an accelerator for confronting difficult planning and decisions that may have been deferred before. Succession is one of them.

The pandemic has squeezed the decision-making cycle – traditionally, families have tended to be very deliberative and reflective, taking their time in making decisions with respect to their businesses. But in the new reality businesses are quickly realizing that they need to act more quickly and become more agile. There is a new sense of urgency about how they prepare for the future.

Around the world, businesses are contemplating post-COVID-19 increased taxes at some point to repay the deficits. For families already contemplating transferring assets, the prospect of potentially higher taxes has moved wealth planning up to the front burner.

Of course, managing the tax liability is just one aspect of successfully transferring the family business. The long-term success of a family business, as detailed in our report, depends on many factors, led by having a clear governance structure. We would reemphasize the importance of putting in place a family constitution and council so that roles, management parameters and decision-making processes are clearly defined.

Another issue is that with business founders living longer, they may not want to relinquish control of the business as early perhaps as they once did. Where the next generation wants to take over the business, this can create family tension between the founder who may be hanging onto the business longer, while the millennial child is keen to get moving with business because they don’t want to be there when they are 70-75.

Such tensions will always arise. But the tax system should not exacerbate them, and Australia’s needs reform. While the recent Budget was more concerned with the immediate stimulus needs of the economy, we hope that the May Budget may be the vehicle for longer-term structural reform – with family business at its centre.

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