The discussion of succession in a family business in Perth is difficult. Often the conversation is difficult and taxation can be a large stumbling block: and the long value driver of an effective family business succession is often at odds with tax effective structuring.
We will go over a few classic examples of how tax structuring can mess up with family business planning.
Payroll tax
If you pay a family member a wage the wage will be liable for payroll tax. So a simple (and effective) strategy for a family business is to remunerate the family member in another way that is not subject to payroll tax.
And the tax savings can be significant. If a family business (in Perth) is paying the family a combined wage of $300,000 a simple “change in the bookwork” can save the family a repeated tax saving of $16,500 a year! If the family business operated outside of Perth or Western Australia the payroll tax rates will change.
However, the tax change is not necessarily that easy. The family member will likely need to understand how franking credits work and a discussion on why a family trust is used will be helpful. And apart from the educational piece on restructuring the extended families finances the impact of how banks will view the trust distribution as opposed to a straight salary.
If the family member becomes divorced or if they cannot get finance the family might have to find ways to help the family member buy a home which might go against the values the family holds dear.
Capital gains tax
If a family business is transferred to the next generation the business, for tax purposes, is typically viewed as “sold” for market value: even if no cash changes hands.
And while there are small business concessions for restructuring to the next generation: they often do not apply due to their technical nature or the narrow focus of the concessions.
Sometimes the succession of the business can only be achieved by a sale that triggers capital gains tax. And while the tax burden might be unsatisfactory the impact of an unsuccessful transfer must be considered.
Where a family incurs such a tax liability it, sadly, could have been prevented by a careful structuring in advance by using the right kind of tax structures like a unit trust in some instances.
Stamp duty
The sale of property from one generation to another sometimes triggers stamp duty. So a family in business might not want to transfer property within the family group simply to avoid stamp duty on the transfer.
Often a good strategy is to deal with the transfer via your will. And a deep understanding of how a deceased is taxed is critical to planning the transfer through your will.
If this strategy is used only with a view to stamp duty planning it must be countered with the concerns associated with an estate claim under the Inheritance Act.
In some instances a transfer can occur with no stamp duty for pastoral families without stamp duty or tax planning with a unit trust can assist.
Income tax
The concept of income splitting for taxation purposes is a long-term and viable strategy. However, the impact is that a person’s taxable income is lower than what they are effectively receiving in terms of their remuneration.
And while a family office can assist in the management of this process: the potential risk is that a person perceives their worth, or another family member’s worth, to be the equal of their taxable income.
In this instance, job descriptions for family members are incredibly valuable: as often the tax benefits are simply “enjoyed” without the potential extended impacts being applied.
So what can we do?
The impact of taxation is a key driver in generating the wealth and legacy of a family business. However, it is only one factor. A family will have conflict and it will need to start a discussion on how to transfer the legacy.
A chat that is narrowly focussed on taxation at the expense of all else will struggle to become effective. An advisor with a focus on business families, with technical excellence in taxation and proven success in family businesses, is critical to getting a real family business succession – either in Perth or across Western Australia.
At Westcourt we have one focus. We make family own businesses great. And it is not about ideas: it is about execution – so call us to see what happens when we work together so your family business can become great.
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