Time to take family business seriously

Regardless of what happens in September, the family business sector in Australia will be getting a lot more attention from governments in the future. With the Gillard government now in survival mode, don’t expect Gary Gray, the sixth small-business minister in three years, to do much before September 14. But down the track we could be seeing changes that could transform the governance of family businesses, not to mention the way they’re taxed and raise capital.

Potentially, this could revitalise a sector that dominates the Australian economy and yet, oddly enough, has been overlooked.

A recent report from the Parliamentary Joint Committee on Corporations and Financial Services outlines a key problem – basically our laws and tax system have not kept up to date with family businesses, which account for 70 per cent of all Australian businesses.

Family businesses have been ignored by Australian governments, probably because they’ve been lumped as a subset of SMEs.

“Few government departments seemed to have awareness of the existence of large family businesses,’’ the report says. “It was apparent that government agencies have not focused on the characteristics of family businesses, the economic contribution these businesses make or the unique challenges they face.”

The committee acknowledges it’s early days. Awareness of the family business sector in Australia, it says, is “nascent”.

Also, how do you define a family business? Think about it: that can include every business from such names as Myer, Pratt, Gandel and Packer to small companies. Does it include extended family? What about sole traders with, say, the wife helping out from time with the books? Should the owners at least have the intention to pass on the business? Should there be some threshold on turnover or employees? You can understand why government bureaucrats have put it in the too-hard basket.

The report says a more precise definition would allow the Government’s Enterprise Connect program, which offers a free health check of businesses, specialist advice and grants, to be tailored to help small and medium sized family businesses. That’s not happening at the moment.

The report sets out the framework for future governments to develop public policy now missing for this enormous part of the Australian economy.

First, it calls on the government to set up an Interdepartmental Committee to look at family businesses. It would have representatives from Department of Industry, Innovation, Science, Research and Tertiary Education; the Treasury; the Australian Taxation Office; the Australian Bureau of Agricultural Resource Economics and Sciences; the Department of Resources, Energy and Tourism, the Department of Regional Australia, Local Government, Arts and Sport, the Department of Employment, Education and Workplace Relations and the Australian Bureau of Statistics. Who isn’t on it?

The committee would report back to the Minister for Industry and Innovation on coming up with a definition of family business and identifying how many are operating in Australia. It would tackle vexed issues like succession and superannuation and how many family businesses will be shutting down in the coming decade with baby boomers heading off into retirement.

It also recommends the Board of Taxation look at Division 7A of the Income Tax Assessment Act which has been in place since1936. Nearly eighty years on, Division 7A still treats loans and debts to shareholders of private companies as taxable dividends. Critics have argued that it’s outdated. In effect, it implies a view that family businesses are being run by tax cheats trying to get around the rules. These arrangements penalise family companies by imposing more costs and potentially limiting growth. The provision can restrict a family business from financing other family ventures.

The report also looked at lifting the 50-shareholder limit for private businesses. Under Section 113 of the Corporations Act, companies in excess of 50 non-employee shareholders are required, whether they like it or not, to become unlisted public companies and cop all the unnecessary administrative costs that come with it, for example suddenly having to hire a big audit firm to do your books every year. Groups like Family Business Australia have argued this unfairly penalises family businesses running for generations that could inadvertently exceed this limit.

The Senate committee suggested this has to be scrapped. “Evidence before the committee demonstrates that section 113 of the Corporations Act is an example of a general corporations law policy that does not correlate with the specific needs and operational realities of family businesses,’’ it said. It has recommended the Department of Treasury sort something out with the family business sector.

The committee report also looks at abolishing the 80-year life span for trusts in Victoria, Tasmania, Queensland and Western Australia. For good reason too – it will create tax problems for family businesses as the baby boomer owners move into retirement. The trust structure is common for family businesses. According to Treasury estimates, of the 700,000 discretionary trusts operating in Australia in 2009–10, approximately 225,000 were family trusts.

“It is clear that the rule is an example of Australia's legal system not keeping pace with developments in the business sector,’’ the committee said. The rule has been abolished in South Australia.

And finally, the committee has recommended opening the door for private equity investment in family businesses. This would be one of the far-reaching changes. Family businesses are reluctant to engage with private equity because they’re conservative and retaining control is everything. But private equity is now increasingly being used by family firms in Europe and North America, particularly in the transferring of ownership. It’s a matter of time before we see it happening here.

To create more potential access to finance, the committee has recommended the Australian Securities and Investments Commission look into helping family and non-family businesses get access to private equity. 

It remains to be seen whether this government or the next implements the committee’s recommendations. We’re talking here about radical change for Australian business. There will be winners and losers. But what’s critical is that it’s on the agenda for future administrations. For family business in Australia, it’s a game changer.