Succession planning too taxing for SMEs

Small business owners are being penalised for providing their employees with equity under antiquated tax legislation, according to the Institute of Chartered Accountants in Australia.

Under the current legislation, specifically Division 13A*, any discounted shares provided by small business owners, often as part of a succession plan, immediately incur tax for the recipient employees. This tax may be deferred for up to 10 years, but only in respect to ‘qualifying shares’, which requires shares to be offered to at least 75% of all permanent employees. Such a clause is often not practicable for the succession plans of small businesses.

The Institute’s spokesperson on SMEs, Sue Prestney, said whilst the Institute welcomed the Federal Government’s new succession planning grants category of its Building Entrepreneurship in Small Business program, she asks why the relevant tax laws fail to keep up.

“Why is it that every time a client wants to give some equity to key employees, often with succession in mind, they face a litany of tax traps?” asks Ms Prestney.

In response, the Institute of Chartered Accountants has developed a Succession Planning Toolkit for accountants. The kit is a unique planning resource, designed to make easy the development and implementation of a succession plan. The guide will provide step-by-step strategies for maximising profitability to increase value for future succession; as well as three modules of real-world guidance and case studies, and customised self-assessment checklists and planning forms.

Additionally, the Institute advocates an extension of Division 13A regarding equity, to amend the ‘qualifying shares’ definition by removing the requirement of offering shares to 75% of employees. Such a move would involve limited legislative change and loss of government revenue as it would involve the tax being merely deferred, rather than permanently avoided.

Ms Prestney argues: “As we face the impending exodus of the baby boomer generation from small businesses, it’s crucial that every attempt is made to make easy succession planning by business owners. Extending Division 13A would be a simple measure that would enable small business owners to secure potential successors”.

* Division 13A of Income Tax Assessment Act 1936.

The Institute’s Succession Planning Kit is available online at: www.icaa.org.au/resources/succession