Report urges ‘family business’ definition

feature-family-200Family businesses are a very large part of the backbone of SMEs in Australia. How strange then that the term “family business” is not even defined. That may be about to change if the recommendations of a recent federal parliamentary committee report are accepted by the government.

The 248-page report recently tabled by the Parliamentary Joint Committee on Corporations and Financial Services – Family Businesses in Australia – different and significant: why they shouldn’t be overlooked – examined a wide range of issues affecting family businesses, such as the lack of a definition of “family business”, the characteristics of family businesses, succession planning issues, and the role of tax and family trusts.

The report noted that, on some estimates, family businesses account for 70% of all Australian businesses. The committee’s central recommendation was that an inter-departmental committee be established to identify the policy issues facing family businesses that are not adequately captured within the existing policy framework and with existing Australian Bureau of Statistics data collection. The IDC should include: the Department of Industry, Innovation, Science, Research and Tertiary Education; the Treasury; the ATO; and other agencies.

The report said family owned and operated commercial enterprises are an established and enduring feature of the Australian economy, but they have been overlooked by Australian governments.

Although the committee’s suggestion for the establishment of another committee might sound like the whole process could degenerate into a “talk-fest”, the committee’s recommendations should not be underestimated. The fact that such a lengthy report has undertaken a detailed examination of family businesses of itself is worthy of note. So what did the committee recommend?

The report made 21 recommendations, including:

Family trusts

These are an established feature of the family business sector. The report said family businesses, and their representatives, disputed the view that family trusts are designed to minimise taxation. Within the family business sector, trusts are viewed as a legitimate means of conducting a commercial enterprise, the report said.

The Committee recommended that the Board of Taxation consider the evidence presented by the family business sector on the effect of Div 7A of the ITAA 1936 (the deemed dividend rules) on business performance.

The report said there is evidence to support the view that the current operation of the trust tax rules in Div 6 Pt III of the ITAA 1936 is unclear, uncertain and, accordingly, create unnecessary complexity for Australian businesses. Division 6 is currently under review. Given that the Div 6 requirements affect family businesses, the report said the sector should be recognised, and included, in the review process.

The report recommended that the government publicly release the Board of Taxation’s report into the operation of Div 7A.

Trusts – the 80-year rule

Another legislative area of concern is the rule against perpetuities: the so-called 80-year rule. A creature of common law and state and territory legislation, the rule limits the lifespan of the family trading trust and, by extension, family businesses operating through a trading trust structure. The committee recommended that the Council of Australian Governments, or its relevant Ministerial Council, inquire into whether the rule against perpetuities could be abolished in each jurisdiction, or whether its scope can be limited to appropriately exclude commercial arrangements. The report said if COAG determines that it is not appropriate to abolish or amend the rule, it should actively engage with the business sector to alert trading trusts to the financial implications of the vesting requirements.

Definition

The report said there was a need for policymakers to identify the number of family businesses that are small businesses, and if so, whether the definition of small business should be based on the threshold used for tax purposes (annual turnover of less than $2 million) or the ABS’s threshold of fewer than 20 employees.

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