A world where animal spirits are running wild is also one that has temporarily divorced from fundamentals. Experience tells us this often doesn’t end well.
While equities came out of the blocks like Usain Bolt in January, propelled by strong domestic and international share markets, a White House committed to tariffs and slowing interest rate cuts could still derail investment returns in 2025.
ATO has family offices in its sights over succession strategies
The Australian Taxation Office (ATO) is targeting complex private capital and succession strategies in the booming $220 billion family office sector amid mounting concerns taxpayers are getting it wrong.
Tax authorities say succession reviews are a “priority” as an estimated $3 to $5 trillion of assets are transferred from Baby Boomers (born between 1946 and 1964) to the next generation.
“Restructuring activity in the market is not surprising,” the ATO spokesman tells Investment Strategy News. “The average age of the controller of a private business is over 65 and those group heads that are over 55 are planning for retirement.”
He says the ATO had identified issues through its private rulings, which are binding advice on how tax laws apply, and compliance work identifying a “material increase” in the number of arrangements involving private group restructures as part of a larger succession plan.
A private family business will typically comprise of trusts and companies, and, for larger businesses, restructuring can be quite complex.
“We have observed that there will generally be some reorganisation of assets and entities within a private group in readiness for all or part of the private business to be sold to a third party or transferred to the next generation to continue running the business,” the spokesman says.
Reviews are expected to focus on capital gains payments, trust structures and possible breaches of the Tax Act’s Division 7A, which is intended to prevent profits or assets being provided to their shareholders tax free. The ATO’s position on Division 7A is under review following a recent full Federal Court decision.
Tax consultants also say there has been a sharp pick-up in the number of ATO inquiries about wealthy individuals and families.
They claim it is linked to the Tax Avoidance Taskforce-backed Next 5000 review of high-net-wealth private groups who, together with their family members and associates, each control wealth of more than $50 million.
Eleanor Moffat, business services partner at tax consultancy BDO, says the ATO is focusing on “the process gone through to determine what tax has been paid”.
The risk-based reviews request information used to prepare for the tax return, the company’s group structure, financial statements and agreements, typically based on the latest two tax returns. The information is used to refine issues that will be the focus of a comprehensive risk review.
Family officers are encouraged to review their records and recent transactions to correct mistakes with a voluntary disclosure, according to the ATO.
Moffat says that could range from assessing the cost base for claiming capital gains tax on an asset that has been disposed through to payment of state taxes.
Lawyers are also warning about a sharp rise in the number of generational disputes between family members of family offices on issues ranging from capital allocation strategies to who is entitled to what share of the assets.
“No matter how much money, or how much is spent on advice, the best laid plans can still fail,” says lawyer Andew Meiliunas, associate director of Nevett Ford Lawyers, a specialist in succession planning.
Meiliunas says most disputes are privately resolved to avoid publicity.
But high-profile courtroom battles involving the billion-dollar estates of Rupert Murdoch, Gina Rhinehart and Richard Pratt highlight how succession disputes can trigger costly and lengthy legal disputes.
There are estimated to be about 2,000 family offices in Australia created by high-net-worth individuals to manage their affairs, including estate planning tax and investments, according to the management consultancy KPMG.
Capital managed ranges from around $20 million to more than $2 billion with the majority between $250 and $500 million, its analysis shows. The typical generation managing the wealth is the second and third.
The ATO spokesman says: “We recommend that the controllers of family groups document a plan for succession and regularly review it. It is important to include the impact of tax in the plan to avoid unanticipated tax consequences arising when the plan the implemented.”
He warns succession planning “directed at artificial or contrived minimisation or elimination of tax exposures is a concern” where there is evidence of avoidance.
Anna Hacker, client director at Pitcher Partners Melbourne, adds: “Do not wait until the worst case happens. It’s critical to ensure you have the right strategy and safeguards in place.”
