Wealthy intergenerational family businesses fear that impending tax changes might have significant structuring implications, and could potentially lead to de facto death duties.
McCullough Roberston Lawyers Partner David Hughes said a series of reforms, some of which could be announced in the May 12 Federal Budget, could have profound impacts for these families and their related entities.
He said that, after a series of relatively low impact budgets, the Federal Government seemed to be preparing to make sweeping changes to key areas that impact many, if not all, private groups.
“Certainly, it appears that we are going to see significant changes to capital gains tax,” he said.
“It is also possible, or even likely, that we will see enormous changes to negative gearing. Together, these changes could impact almost every family group.”
Changes to the taxation of trusts could have the biggest impact
“Talk about having a minimum tax rate for trust distributions, as much as 30 percent, could be the most significant reform of the taxation of trusts since 1936,” said Mr Hughes said.
“This leads to so many unanswered questions: How will beneficiaries be taxed? Will the taxation of trusts be simplified and streamlined? Who will be exempted? Will a trust remain the best structure for holding family wealth through the generations? How could you restructure if your trust was no longer fit for purpose?”
Mr Hughes said that, while intergenerational wealth management had been around for a very long time, there was renewed current government attention.
This could be linked to estimates that more than $3.5 trillion in wealth will be transferred between generations as large numbers of baby boomers approach retirement.
Mr Hughes and McR Partner Scott Whitla will be delivering a masterclass on managing intergenerational wealth to the Private Wealth Network Family Office Congress on May 13.
They said the event was “dauntingly timely”, given the Federal Budget the night before.
Secret code for death duties?
“The Tax Office has indicated that it is very heavily focused on the treatment of intergenerational wealth,” Mr Hughes said.
“Many people have interpreted that as being code for de facto death duties.”
Mr Hughes said there had been an enormous backlash in the United Kingdom over changes to inheritance tax laws, and there were real concerns that similar measures would start to “sneak into Australia”.
He said that, with the right tax advice, companies could work with the Tax Office and ensure they had the right tax structures to avoid any problems down the track.
Deal with the issues while previous generations are alive
Mr Whitla said it was important that families discussed transition arrangements while the older generations were still alive.
This could avoid interfamily squabbles down the track.
“Often these disputes arise because mum or dad, or both, have died so they are not there to tell their side of the story,” he said.
“Without that, things can get very skewed and a black sheep child can end up taking action against other siblings they don’t necessarily get on with.”
Do not put off the challenging conversations
Mr Whitla said that, even though transition discussions may be difficult, it was important to protect assets between generations and set up optimal succession planning structures.
“There’s a tendency for families to just kick the can down the road on these issues and not deal with them,” he said.
“But many baby boomers are now starting to get to the point where they can’t kick the can down the road anymore. They are going to actually have to deal with this.”
Mr Whitla said families needed to seek advice from people with the right expertise, commensurate with the size of the family wealth.
“I’ve seen family situations where we are dealing with wills that are decades old and might have been prepared by some old friend they knew from school,” Mr Whitla said.
“We also see a lot of disputes over family businesses and the family farm which used to just be passed on to the oldest child, but which are now worth tens of millions of dollars and so are worth disputing.”
“Families can easily squander very large amounts of wealth without the right structuring and an agreed family plan for transition.”
