If I Receive Shares of a Family Business
A business concern adviser has opened up on some of the core revenue enhancement and other related factors in need of consideration when family businesses program for generational succession, including potentially costly mistakes that often take hold of unsuspecting leaders off guard.
Concluding twelvemonth, Michelle De Lucia of KPMG, who co-authored the Family unit Business organisation: The rest for success report in conjunction with Family Business Australia, told My Business that planning for such a succession "should commencement at to the lowest degree five-plus years out" in guild to deliver the concern, the family unit and other stakeholders a smooth transition.
Speaking to My Business about the effect of succession planning this month, Peter Bembrick (pictured) of HLB Isle of man Judd said that, in addition to the operational aspects of the business organization under new leadership, family business owners should likewise factor in the diverse tax and other related considerations that form role of any ownership transition.
Distribution of income and ownership
If there is only one child to have over the business, or all siblings will take over in equal measure, the succession can be a bit more straightforward. But added complexities arise when only some of the leader's children will take the reins of the business organisation.
"There is frequently a balance that must be establish between helping out the side by side generation and passing on the 'family unit jewels' to them, and providing sufficiently for the founders of a family business organisation to savour a comfortable retirement and benefit from the fruits of all their hard piece of work in edifice upward the business," Mr Bembrick explained.
Every bit such, he said that it is "important to be clear as to which assets and the extent of income distributions that will become to the children during your lifetime, as compared to assets and funds that will be retained and distributed only after your expiry".
"The difficult process of dividing the family wealth amongst the members of the next generation can include:
- Balancing the relative value of giving.
- Transferring or leaving ownership in the business organization assets/entities to one or more family members who are involved in the business.
- Providing other family members with non-business assets.
"Information technology tin too be more difficult where some receive funds earlier than others (either due to their age or their personal needs/circumstances), even more so where some effectively receive a portion of their 'inheritance' during their parents' lifetimes, in which case their siblings may need to receive a greater share of the assets under their parents' wills in club to maintain equity."
Mr Bembrick added: "Alternatively, if the shares in the companies through which a family business are to be carried on are simply left equally to all of the founders' children, but not all of the children are involved in running the business, this can sometimes produce a hard state of affairs where at some indicate there must exist a negotiation betwixt the siblings to agree a buy-out of some of the shares, and funding such an conquering is not always straightforward."
Is a business restructure required?
Acceptable planning for the succession should include a review of the construction of the business concern, Mr Bembrick said, which will simultaneously determine electric current suitability too every bit determine the optimal business construction for the intended succession arrangements.
"This may include putting in place entities for holding investments, as function of the procedure of building upwards family wealth split from the business, and/or as a vehicle for investing the proceeds of a future business concern sale," he said.
When examining the construction of the business, he suggests also looking over the following aspects:
- The level of take a chance arising from the business organisation operations for the operating entity/(ies) and the directors/owners.
- The extent to which non-business assets are, or can be, separated from business avails.
- Where applicable, separate the operations of one business within the grouping from another concern.
- The financing of electric current/hereafter business operations and capital acquisitions, to meet ongoing greenbacks menses and working capital letter needs while appropriately managing risk.
"If some restructuring is required, a review will then be needed to determine the most effective way to restructure, taking into business relationship the possible application of concessions and exemptions such as the modest business capital gains tax (CGT) concessions, and also remembering to analyse other tax implications such as GST and stamp duty (especially where existent property is owned)," Mr Bembrick said.
"The construction review should include whatever other assets related to the business, such as the business premises, certain intellectual property (IP) such as patents or trademarks, and other intangibles, which are ofttimes owned separately to the business concern operations (or if not, perchance they should exist)."
Regardless of what grade a restructure may take, and whether shares will be issued to family unit or not-family unit members, Mr Bembrick said that it is important that "advisable valuations" of assets are obtained.
These valuations should cover not only the relevant business concern entities and avails they hold, but as well the market value of "goodwill and other intangibles and real property".
"And for these transactions to exist undertaken at market value so as not to fall foul of the tax rules, which generally deem transactions to accept place at an arm'due south-length market value, regardless of the actual consideration paid," he cautioned.
Tax considerations
As previously outlined, restructures can impact tax concessions and considerations for the business and the family.
Mr Bembrick said that item consideration should be given to CGT.
"Special tax considerations will arise when the business was established prior to September 1985 (i.eastward. pre-CGT), or key business assets such every bit real belongings were acquired pre-CGT," he said.
"In these cases, there should be no tax payable by the founding shareholders nether a restructure, and the CGT cost base of any new holdings in the business entities under the new structure would be 'reset' at their current market value.
"A similar upshot would arise if there is no restructure, or simply a partial restructure, with the issue that pre-CGT interests in the existing entities are only left to the founders' children in their wills."
Minor business organization may also exist eligible for CGT concessions where buying was acquired after the introduction of the tax. But Mr Bembrick warned that there are "several key requirements that must be satisfied, and quite a few pitfalls to be avoided". These include:
- Different classes of shares on issue, which he said can lead to "i of the almost plush pitfalls".
- The often-disregarded issue of a "meaning individual" — i.e. someone who holds at least twenty per cent of the voting, upper-case letter and dividends of the visitor — when applying the small business CGT concessions.
"This is a topic in itself, but suffice to say that the process includes a conscientious review of the shareholding structure of the operating entities and the nature and market values of their assets," he said.
Another tax issue arises where a business organisation owns holding — either as the business premises or unrelated properties.
"The landholder duty rules can apply in the relevant country/territory to both a transfer of shares in the company and to a new issue of shares in the company," Mr Bembrick noted.
"This arises when the visitor holds land valued at $two million or more, and the transaction results in someone holding an interest in the company of 50 per cent or more.
"Therefore, it should not be a concern where shares are issued to a new owner involving relatively small percentage holdings where all shares are of the same class, although care should be taken when the company has unlike classes of shares on issue as to how the relative percentage ownership of each individual has been adamant.
"If duty is payable, the same charge per unit scale applies equally for direct transfers of existent holding, and the amounts involved can be significant, so careful planning and awareness of these issues is important. Similar outcomes will ascend when issuing or transferring units in a unit of measurement trust that owns existent property."
Employee share incentives
Some other gene Mr Bembrick noted is worthy of consideration is the issue of employee shares in the business.
"Consider whether at that place are primal employees who have been and/or volition be critical to building up, maintaining and continuing to grow the concern, and whether providing them some buying interest in the business will assist incentivise them and make it more than likely that they tin exist retained," he said.
"Go on in mind that this may need to be counterbalanced off against the expectations of the family to retain command or fifty-fifty complete ownership in the medium and long term.
"I option may be issuing shares to a central employee simply with a mandatory buy-back period and other conditions that allow the family to take back complete buying in due course and/or on certain events occurring."
Co-ordinate to Mr Bembrick, issuing shares to select employees is a "tricky area" given that it requires a look at the commercial, revenue enhancement and practical implications from all three parties: the business organization, the current shareholders and the employee(s).
"One common recommendation to clients is to structure the transaction equally a new share issue, rather than a transfer of existing shares (which would generally accept tax consequences for the holders of whatsoever shares to be transferred)," he said.
"Shares can exist issued to the employee personally, only more commonly they volition be issued to a nominated discretionary trust or visitor controlled by the employee, allowing dividends and any potential future capital gains to be distributed inside the family group in a taxation-effective manner.
"The shares could also exist issued directly to another family member (e.thou. the employee's spouse) with a lower taxable income and lower marginal taxation charge per unit, which can exist helpful in saving tax, but lacks the flexibility that tin be gained past using a trust or company."
Another factor to examine is whether to issue the shares for nil or at current market value, and if it is to be the latter, how the acquisition will be funded. Each has its ain and varied taxation implications, including fringe benefits tax (FBT).
The higher up information is intended as a general guide only and does not constitute financial communication.
Tax, income implications for family unit business organisation succession
Source: https://www.mybusiness.com.au/management/5448-tax-income-implications-for-family-business-succession
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