FAMILY - Grant Thornton

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T A X DOES CAPITAL GAINS TAX THREATEN THE WEALTH OF YOUR FAMILY AND YOUR BUSINESS This article explores the impact of Capital Gains Tax (CGT) on trusts, and the interplay between CGT and estate duty. On the 23rd of February this year, Finance Minister Trevor Manuel proposed the introduction of a Capital Gains Tax. Though no CGT legislation has yet been passed by parliament, it is sure to happen, and CGT will come into effect on 1 April 2001. Are trusts still a viable vehicle for wealth preservation Family businesses often use trusts as a means of protecting assets from creditors, and as a vehicle to ensure that the growth of assets does not vest in the hands of the owner-manager directly, but rather in another legal entity, the effect being that estate duty is minimised. At present, a natural person will pay estate duty at a rate of 25% on the net value of an estate in excess of R1 million. The increase in the value of the assets owned by a trust will not, under current legislation, be subject to the 25% estate duty. CGT, as proposed, will result in the trust paying the tax on assets sold by it at an effective rate of 16 to 21% of the gain realised on the disposal of the asset - for example, shares and immovable property. If, on the other hand, the assets were owned by an owner-manager directly, the CGT rate would range from 0 to 10,5%, the effective rate for natural per- sons (the rate being dependent on the level of taxable income), which is cheaper than that payable by a trust. It is difficult to give a hard and fast rule and state that, in order to secure a reduction in capital gains tax, all assets owned by a trust should be awarded to the owner-manager or family member(s) before April 2001. Family businesses should explore this issue in the context of the protection that trusts offer from creditors, and the ability of the trust to ensure that growth in the value of the assets falls outside the estate. Double taxation: the interplay between CGT and Estate Duty In the event of the death of the owner-manager who is possessed of assets, and where under the will the assets are awarded to family members, these members will take the assets over at the base cost attributable to the deceased in accordance with the Guide to Capital Gains Tax issued by the Commissioner of the South African Revenue Service (SARS). The heirs will not pay CGT on the date on which the assets are inherited, but will pay CGT on the date on which the assets are finally disposed of. “trusts offer protection from creditors, and ensure that assets fall outside the estate” CGT will be due on the difference between the price realised and the base cost attributable to the deceased. At this stage it is unclear whether the estate will be allowed to deduct, for estate duty purposes, the CGT liability attributable to those assets awarded to the deceased’s heirs. In the event that such a deduction is denied it will mean that the deceased will pay estate duty on the assets awarded to the heirs, and that the heirs will inherit a CGT liability together with the asset from the deceased. This is clearly double taxation in that the same asset(s) will be liable to both estate duty in the hands of the deceased and capital gains tax when the heir(s) finally dispose of the asset to a third party. Should assets be held in a trust or a company If a trust currently owns a range of assets it may be necessary to determine whether or not the assets owned by the trust should be disposed of to a company, since a company will pay CGT at an effective 15%, whereas a trust will pay the tax at a rate of 16 to 21%. Any proposed sale to a company would have to be carefully considered and weighed up, taking into consideration the anti-avoidance provisions to be 4 FAMILY BUSINESSBRIEF
C H A N G E “Trusts are a useful tool in estate planning, and capital gains tax will not necessarily detract from their advantages” introduced under the CGT legislation. Should property be held by the trust or individual family members Under the proposed CGT, the primary residence of individuals is not subject to the tax. H o w e v e r, it is unclear whether houses owned by trusts and occupied by individual family members will constitute a primary residence. It may be p referable for family businesses to acquire such pro p e r t i e s in personal capacities rather than in a trust - failing which CGT would become payable when the house is disposed of to a third party. The downside to this is that transfer duty, which is not insignificant, would become payable on such a transfer. In the event that government decides to exclude homes owned by trusts, companies or close corporations, family businesses should consider allowing such p roperties to be transferre d back to the natural person, which would be free of transfer duty within a certain time period if the authorities heed the calls made by various business org a n i s a t i o n s . Trusts are a useful tool in estate planning, and capital gains tax will not necessarily detract from the advantages of this mechanism. Family businesses would, however, do well to consider the implications and options well before CGT comes into effect. ■ CREATE A CULTURE OF CHANGE Change poses many challenges for family-owned businesses. John L. Ward tells you how to cope. The years ahead promise even faster and more fundamental change for family firms. Industry consolidation, shrinking strategic life cycles, e-commerce, global competition, and revolutions in supply-chain management and logistics are just some of the well-known forces. Change is a threat Rapid change threatens familyowned firms more than other companies, for several reasons: ● Family firms have deeply entrenched traditions ● Leaders typically serve long terms ● Family firms often profess cultures of loyalty, stability, and paternalism ● Long-time owners tend to be risk-averse ● Successors are reluctant to challenge predecessors’ philosophies and ways. Beyond business skills More than any business skill, future leaders of family firms will need to be leaders of change - without sacrificing the family’s values or the reputations of previous family leaders. No texts on leading change address this dilemma of protecting the past but changing the future. The key idea is to recast or reinterpret the past to emphasise that historic success was more a result of embracing change than it was the fruit of any particular strategies. To do so, some family firms have adopted and “Tradition is eternity, not history.” preached mottos celebrating change. A few examples: ● “Our tradition is change” ● “Innovation is our tradition” ● “Tradition is eternity, not history” ● “We believe in new ideas and old ideals.” Reinforcing change cultur Once the firm’s tradition is portrayed as a culture of change, then that culture needs to be reinforced for the future. Ideas for doing so include the following: e ● Celebrate new ideas, even more so than loyalty and tenure ● Stress dissatisfaction with the status quo ● Tinker constantly with management systems and practices ● Charge an independent board of directors with the responsibility to challenge strategic assumptions ● Share financial information with as many managers as possible. Finally, leaders of family firms need to reassure the organisation that the future will be exciting. Emphasising an inspiring vision and a compelling philosophy of management gives employees confidence that change is possible, that it will lead to a better tomorrow, and that it is worth taking risks to accomplish. ■ John L. Ward lectures at the Kellogg Graduate School of Management at Northwestern University in Illinois. Printed by permission of the publisher of Family Business (Autumn 1999), Family Business Publishing Company, www.fambuspub.com FAMILY BUSINESSBRIEF 5
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FAMILY - Grant Thornton

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