Often structures are put in place to hold assets or operate businesses for good reasons. However, over time the needs of the family and the business may evolve such that the structure has become irrelevant. Continuing to add assets to the redundant structure may be expensive and difficult to fix later – particularly if it is envisaged that there will be a separation of business and other assets. Transferring assets from one entity to another often triggers taxes such as income tax, capital gains tax, GST, and duty (there are some concessions for transfers occurring on death or divorce).
Also, some structures become unnecessarily complex and a burden to administer. If the current generation can’t explain the structure and how it works, there is a good chance that the next generation of owners won’t understand it either. This could lead to ineffective decision making.
Succession planning is a family journey – it takes time and effort to consider the longer-term needs and aspirations of the family, the business and wealth. Is it time to build wealth outside of the core business asset, i.e., diversify investments or build a passive investment portfolio? What should the structure be to hold this, and who should have an ownership interest? Is the family looking to attract investment from others and if so, does the current structure permit this?
As well as determining the successor(s), consideration should be given as to how to effect the transfer of ownership of assets. Will the transfer trigger tax or can the transfer be implemented over a period in a more tax-effective manner?
As the family grows to more than one generation and with different branches of family, the ability of each family to generate and manage their own wealth separate from the family business is important. Family conflict is not unusual where all assets are jointly held, and no family member is independent from others. For example, I recently worked with siblings in a family business where all assets, including family homes, were housed in the one structure. Not only was the ownership structure tax-inefficient (the family was not eligible for the main residence CGT or land tax exemptions), but the family was also required to pay a market rent to live in their own homes. Of more concern was the fact that in the unfortunate event that one of the siblings passed away, their family could potentially be homeless as they did not own their properties. Dealing with the death of a family member is difficult enough without adding financial complexities.
My tips for ownership structure:
Review the structure regularly and as required. What worked in the past is not necessarily the right structure now. Is the structure still relevant considering the needs and goals of the family? If not, seek advice (generally legal, accounting and tax) to assist the family to determine the best structure going forward. Is it possible to restructure without adverse costs? It may be preferable to leave existing assets in current structures rather than transfer them and trigger taxes, but don’t perpetuate the issue by ignoring it!
Consider the structure in advance of acquiring new assets (and seek advice early!). If it doesn’t make sense to acquire the asset in the current structure, establish the new structure (which may have different ownership reflecting the longer-term succession plan for the family) in advance.
Does the structure make sense, and can it be explained? For example, are there any complicated fees/loans/transactions between entities that don’t make commercial sense? If so, the ATO may be interested in the dealings, especially where it is driven by tax avoidance purposes. Sometimes a simpler commercially relevant structure is appropriate. In one family the structure was so complicated, the bank held security over all assets and required personal guarantees from directors – all of which impinged on the ability of the current owners to transition ownership of the business.
Are there loans between entities or family members that will never be repaid? If so, consider dealing with them (but seek tax advice at the same time). Ownership of an entity should not pass with these loans in place – you don’t want the new owner to call on the loan to be repaid. Also, has the current owner effectively drawn out all value by way of loan? In one transaction, family business owners had effectively drawn out the value of the business by way of loan and were surprised when an offer was made for the company shares (on a debt free basis) that required repayment of the loan and therefore they would be left with minimal cash proceeds.
Tidy up redundant entities in a planned logical manner. Liquidate redundant companies or vest trusts if they have no future use.
Is it proposed that different parts of the business or different assets will transfer to different family members? If so, will the current structure facilitate the transition? If not, is it possible to restructure without adverse tax consequences in advance? There are a number of tax concessions that allow restructures and a deferral of any tax until such time as the asset is sold outside of the family group
Taxation is inevitable and one of the certainties of life, however, why ‘donate’ additional tax unnecessarily to the Government (as famously said by Kerry Packer many years ago) by fixing structures that are past their used by dates.
The right ownership structure must be considered well in advance and as part of the succession planning process.
About Michelle Hartman
Michelle is a trusted advisor to family enterprises, privately held companies and High Net Worth individuals.
Michelle is recognised for providing practical, commercial advice to businesses and their families. Her in-depth experience places her well to support private clients and their families with estate and succession planning, structuring for growth and long term wealth accumulation, divestment and annual compliance.
Michelle brings strong technical and commercial skills in tax and family enterprise consulting and is in demand as a subject matter specialist and presents for various professional organisations.
Family Business Australia and New Zealand provides this article for your information only. The content of the article should not be taken as advice. If you wish to explore this topic, please consult an advisor who you consider to have the expertise to provide specific advice in relation to your family business.