Business families in South Africa still face a complex tax landscape
JOHANNESBURG, 10 NOVEMBER 2020: KPMG Private Enterprise has released its 2020 KPMG Private Enterprise Global Family Business Tax Monitor* across 54 countries and territories to assess the tax costs associated with family business ownership succession, either on retirement or inheritance.
Family business helps drive the economy – accounting for the majority of global GDP and employment. However, for families that want to keep their business in the family, and pass it on to the next generation, there are several aspects that they need to take into consideration.
In many countries around the world, a family looking to pass its business to the next generation is eligible to claim exemptions or deductions. However, South Africa does not stand out on a pre- exemption tax basis for passing on ownership of a business.
“Tax liabilities in South Africa can be excessive, depending on the value of the family business. As such, proper planning and structuring of the investment in the family business should be considered in light of the tax implications to optimally manage the tax burden. Despite changes in the tax legislation regarding the use of trusts as vehicles to hold family assets, the non-tax benefits of trusts still hold true,” says Alan Barr, Partner and Head of Private Enterprise in KPMG South Africa.
Previous results of the survey noted a concern for both South African family business owners as well as the regulators, (i.e. National Treasury and the South African Revenue Service). Unfortunately, the 2020 results hold the same apprehension and create room for conversation around what this means for business continuity over time. South Africa again has the one of the highest, if not the highest, effective tax costs for an individual passing on the ownership in a business to the next generation (for a family business valued at €10 million).
Interestingly, is that passing on ownership through inheritance results in an effective tax rate of 35.6%, whereas passing on ownership through retirement (donation) results in an effective tax rate of 36.5%. From an ownership succession perspective, this is not a strong enough incentive to allow for transition while the prior generation is around to share valuable insights, i.e. upon retirement.
In much of Europe this is mirrored with France, Ireland, the Netherlands, Spain and the UK having the highest tax rates of countries surveyed in Europe for transfer of a EUR10 million family business at death, before exemptions.
“Depending where they are domiciled, the tax complexity for family business can be enormous and the burden is likely to grow as government budgets are stretched and the need for additional revenues becomes more acute,” said Tom McGinness, Global Leader, KPMG Private Enterprise Family Business, KPMG Private Enterprise in the UK.
Succession planning is a vital consideration for business families to effectively transfer their business from one generation to the next.
The planning cycle for families has accelerated, even more so with the COVID-19 pandemic. Families have an increased sense of urgency about protecting the future of their business and planning for the transfer of ownership to the next generation.
Tax planning for the transfer of a family business needs to be part of an overall planning process and the 2020 Global Family Business Tax Monitor provides a blueprint to follow that encompasses establishing robust family governance, including a family constitution, as well as ensuring the next generation is prepared to assume control of the business.
Family businesses tend to take a long-term view and have a strong sense of community. Increasingly, families are considering the broader societal impact of their business and their role in addressing issues from climate change to inequality and education. “We encourage business family owners to use the 2020 Global Family Business Tax Monitor to understand the global landscape, and ultimately to ensure the tax costs associated with ownership succession are acknowledged and appropriately factored into the succession planning,” concludes Barr.
The KPMG Global Family Business Tax Monitor provides an in-depth perspective on the varied and changing tax environment for family businesses around the world, along with insight on how families can best prepare for transitioning their business to the next generation. The report highlights how the impact of COVID-19 could increase the pressure on families in the coming years.
Learn more by accessing the full report.
For more information, contact:
KPMG Private Enterprise:
Partner & Head of Private Enterprise
About the Global family business tax monitor report
The Global family business tax monitor is based on the findings gained from 54 countries, regions and jurisdictions who undertook a taxation review on two case studies providing details on how their local tax regulations would apply to each case. The study explores the effects taxation can have on the transfer of the business to family members upon inheritance and as a lifetime transfer (on retirement).
About KPMG Private Enterprise
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KPMG Private Enterprise Global Center of Excellence for Family Business
As with your family, your business doesn’t stand still — it evolves. Family businesses are unique and KPMG Private Enterprise Family Business advisers understand the dynamics of
a successful family business and will work with you to provide tailored advice and experienced guidance to help you succeed.
To support the unique needs of family businesses, KPMG Private Enterprise coordinates with a global network of member firms dedicated to offering relevant information and advice to family-owned companies. We understand that the nature of a family business is inherently different from a non-family business and requires an approach that considers the family component.
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