Planning is the key
For those involved in family businesses or companies, the taxation consequences – especially regarding capital gains tax (CGT) – of poor or inadequate documentation of family arrangements can be annoying at best, and at worst, ultimately distressing.
Deloitte Partner Spyros Kotsopoulos shares his advice on how best to approach family ‘matters’ with a view to avoiding unintended and unfortunate outcomes.
“People who have large complex business operations perhaps don’t get into the detail as to who owns what and what the implications are for each particular type of investment holding they have. In some respects the patriarch (for example) of the family sees the business as an extension of himself and so can arrange his family matters in accordance with his will without regard as to the structure in place – he thinks by expressing it in his will he can direct where assets are delivered upon his death.
Planning is the key
Unfortunately, the more complex arrangements are, the more likely the position is that their whole family company group structure arrangements need to be considered in terms of properly planning their affairs, or dealing with their estate.
For example, the family leader may well say I want to give my portfolio investment to one of my children. The problem is that the investment portfolio may not sit within their own personal holdings – it is actually owned by their family trust and on the person’s death the trust continues to hold that particular investment. The ownership of the portfolio doesn’t change on that person’s death; all they can do is express some wishes as to how they want things directed or dealt with. But the reality is it’s not within their power to control that particular portfolio. It will depend on the decisions of the trustee of the family trust.
So, understand what your structure is, what the tax consequences are in unwinding that structure, and to what extent you want to “rule from the grave”.
Sometimes there’s a desire for people – especially when they have accumulated great wealth – to direct the group to do a certain thing or direct certain assets to be dealt with in a certain way. To what extent this is possible depends on the existing legal structures adopted by the family.
However what they also need to do is to factor in different circumstances and scenarios: following one spouse’s death the surviving spouse has different needs, directions and wants, or the children themselves may have different aims, goals or risk profiles between themselves.
When seeking to allocate assets between family members (i.e ‘carve up the pie’), the relevant person planning their affairs wants to be mindful of questions such as what risks are associated with each asset (for example compare passive real estate investment versus a trading business), if there is a fall-back position in the event there’s an unforeseen hardship(e.g. The business fails or one of the children gets divorced).
People should be very conscious about how they give maximum asset protection to their child no matter what the circumstances. For example, they should consider how a business venture may expose them to personal litigation, or how divorce proceedings may potentially impact them.
The key is planning and it is in everyone’s interest to have these difficult discussions sooner rather than later. If after a person’s death all that’s taking up everyone’s time is litigation then no-one wants to put their hard earned effort into a business that they don’t even know if they are going to own at the end of the day.
Rightly or wrongly, issues that haven’t been spoken about in the past all of a sudden become extremely relevant. It’s incumbent on people who are estate planning to have an adviser talk to the family members to get to the nitty gritty, to get their views as to how the business has been run or their perception of their role in the family in the future. That must be fed back to the person that’s arranging their affairs so that they can deal with any of these factors.
There has to be a holistic approach in dealing with family arrangements, not just income tax, not just legal. It’s to do with a lot of the other issues that aren’t going to appear on a balance sheet or the financial statements and sometimes aren’t going to appear when a father or family leader confronts them.
Even if it’s uncomfortable these are matters that need to put on the table now.”
Spyros Kotsopoulos is a Taxation Partner of Deloitte Growth Solutions with over 17 years practical experience dedicated to tax structuring and strategy providing innovative solutions to clients. Spyros advises in a wide range of corporate tax, FBT and GST matters.
This opinion piece was first published on Deloitte Private Matters and is reproduced here with the kind permission of the author.
