Australian families are coming up against a new set of hurdles with aging baby boomers retiring and passing on – or selling up or closing down – family businesses. A Senate inquiry held in 2015 looked into the family business sector, in Australia worth over $4 trillion, and the sometimes enormous tax issues on the events calendar for many Australian families.
Succession planning and strategy is a huge topic, with every business owner having to choose someone to take over or to sell, but in essence, how to transfer the business and assets without triggering too many adverse tax events.
Trusts have been used for this purpose for some time, though taxes vary depending on what asset is being transferred. Property is one such asset that attracts hefty tax bills (stamp duty or capital gains tax) even if no money is changing hands, which can be damaging for finances.
The inquiry looked at all types of family businesses – the Packers, Pratts, Murdoch’s – to the green grocer at your local village, your local fish and chip shop and any of the hundreds of thousands of family-owned businesses that line Australian streets. Family businesses make up about 70 per cent of Australian businesses and the staff in them make up half of the workforce.
Trusts in their current state could land everyone in trouble in the coming years, which is why the inquiry set out to figure out how to avoid the worst of it.
So what’s the problem?
There is the potential for a bubble to develop around trusts, with the 80-year rule regarding the lifespan of trusts the primary complication. There is an 80-year limit on how long a discretionary family trust can exist (except in South Australia) which means that a trust must come to an end after 80 years, triggering a tax event.
Families must then find up to 46.5 per cent of the trust’s value to pay the tax bill, potentially threatening a family business in a very serious way – half the value of an 80-year-old trust is usually nothing to sneeze at.
The death of these trusts causes an ‘artificial taxing point’, and there is lobbying going on to try to get this 80-year limit removed to avoid these events. Nobody even knows where the 80-year rule came from, and because of that, there doesn’t seem to be any good reason to keep it.
The rule complicates existing business structures, so for example if a family wants to buy a major asset, but their trust is already getting on a bit at age 60, it wouldn’t do them well to place the new purchase into that trust.
This means a new trust is created, making things unreasonably complex and increasing the cost of operating the trust, the business, and impacting future generations. In the past this problem was overcome by trust cloning, however this is no longer available as an option as the exemptions were repealed in 2008.
To find out more about trust structures and the 80-year rule, contact Vanessa Ash for a discussion about your options.
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