For most business leaders, minimising tax is a key objective and something that is considered in any material transaction and in the legal structuring of their businesses. However, focusing too closely on tax matters can sometimes result in a significant reduction in the market value of a business.
Active Knowledge Question:
When seeking to minimise your business’s taxation liability, do you balance that outcome with the impact on the capital value of your business?
No matter where your businesses may be located, taxation is a material cost, both in terms of compliance and the amount that you end up paying. It is a subject that earns the attention of any business leader on a continuous basis.
It is also a cost that is often considered on a short-term basis and in isolation from operations and capital value. As taxation law is continually changing it is difficult to plan for the long-term. Set and forget is certainly not an appropriate approach to taxation affairs.
However, there are material risks that can arise from even the best taxation planning. These risks can go to the heart of a business, that is, its capital value. Keep in mind that by capital value, I am referring to the ability of your business to earn an enduring income. These risks can be multiplied manyfold when succession comes into the mix.
In undertaking taxation planning, we typically look at the possible taxation outcomes and seek to structure the business or transaction in a manner that will minimise the incurrence of tax, in whatever form that tax may come.
We rarely pause to consider how that structuring may impact the operating business nor what its long-term implications might be.
As a simple example, we may choose not to change the existing corporate structures, so as to not give rise to capital gains tax cost. But this raises the question of how effectively that structure will work when control of the business is transitioned to the next generation.
We may have saved tax in the short-term, but we may have set the entire business up for failure by forcing the next generation to take over a legacy structure that will only cause disputes between family members – and the eventual collapse of unity and the family businesses. The taxation cost of transitioning the structure may be the capital cost of setting the business up for success in the next generation.
In seeking taxation advice, especially when succession is on the horizon, always ask your advisors to consider the governance, operational and succession issues that it may give rise to.
Remember succession is all about ‘enabling the compounding of wealth from generation to generation while ensuring family unity, individual growth and a sense of contribution’. It is against these outcomes that any tax advice must also be measured.
An entirely new level of performance.
Want to become a part of the Entrepreneurs+ Community and learn how to make your business competitively fit? Join now.
All the best in the success of your business,
Richard Shrapnel
