Family business advocate urges small business minister to consider rollover relief to capital gains tax

The year of 2020 saw so many challenges — many of which are still being felt today. Throughout it all, family businesses provided a backbone for the Australian economy. They were resilient, they pivoted, they were agile. Their local suppliers and supply chains meant their stock levels were capable of meeting customer demand when global supply chains ground to a halt. Their family values meant they put their staff and their customers ahead of themselves — not only were they tapping into support like JobKeeper, but they were taking hits to their own pockets as well to protect their people and their livelihoods.

It is important for the government to understand that there is no “typical” family business. Family businesses come in all sizes: small, medium and large. They operate very differently. Succession planning isn’t simply handing over the reins to new leadership. There is a transfer of assets alongside the knowledge. There is a personal investment alongside the business interest.

Minister Robert, one thing you can do to help support this unique — but large! — segment of the business community is to introduce capital gains tax (CGT) rollover relief for family businesses.

CGT was introduced in Australia on 20 September 1985 by the Hawke/Keating government. In more than 35 years, we have seen little change with the exception of the small business CGT rollover concessions.

However, as I’ve already mentioned, family businesses come in all sizes — so not all family businesses could benefit.

CGT means family businesses only transfer ownership of the business upon death

It’s confronting, but under our CGT regime, the best tax plan for family businesses is to transfer ownership upon death.

That doesn’t mean that the next generation sits idly by in the wings. Children and grandchildren not only work for the business, but also contribute their own finances and assets to the success and health of the business — but with no prospect of ownership during their parent’s or grandparent’s lifetimes.

With people living longer, it can mean the next generation must wait several decades. The most high profile example of this is the British Royal Family. Prince Charles is now in his 70s and has yet to run his own show. This is replicated in family businesses all over our own country.

Let’s look at how this can affect a business

The founding generation set up a $2 company. They issue 2 x $1 shares. Then they lend the company (personal) funds to get off the ground. The founding generation work the next 30 years building a business that has a turnover in excess of $500 million and the business is now worth $50 million.

The founding generation decide it is time to retire and pass the baton — being the management and ownership of the business — to the next generation.

When they discuss the transfer of shares with their accountant, they learn that with a cost base of $2 and a valuation of $50 million, that is a capital gain in excess of $49 million.

Even with discounting, it creates a tax bill in excess of $12,250,000.

It’s not feasible to transfer ownership this way. So instead the business will be passed on as an inheritance at some unknown date in the future. There is a knock on effect on each generation.

Currently only 12% of family businesses successfully transition to the third generation.

Introduce CGT rollover for family businesses, regardless of size

Introducing CGT rollover will allow family businesses to successfully transition to the next generation, not only to obtain management, but also ownership. It will remove not only the financial strain CGT causes to families transitioning but also the emotional strain.

And, of course, it will make a huge difference in improving the sobering 12% of family businesses surviving to the third generation.

The CGT rollover relief needs to allow for rolling the shares into a family trust. Families prefer to transfer the shares from an individual to a family trust to avoid future CGT events or to allow for shares to be split between multiple children.

Minister Robert, I welcome you to the family business community and hope you are taking the time to hear the stories of how family businesses have helped to shape our economy in the past and can contribute to the economy in the future.

Please know that family business does not equal small business. Family businesses come in all sizes, small, medium and large businesses. This one tax change could strengthen the Australian economy and ensure family businesses have every opportunity to successfully transition to future generations. It’s time to leave your mark and introduce the tax change family businesses need.

_{First published by smartcompany.com.au on April 28, 2021}