wealth and family business advisory session 9

Wealth and Family Business Advisory session 9

Cheryl Howard – Consultant – Cheryl Howard ConsultingLouis Venter – Managing Director – Wealth Succession

Keith Engel – CEO - SAIT

YOUR KEY TO THE TAX COMMUNITY

Corporate Silo

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Trust EstateBusiness

Pension

We are here

The Business Exit

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Working Life Ownership

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Working life exit

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• Does my labour drive the enterprise value of the business?• If yes, I cannot quit without closure of the business or,• I must sell the business to someone else's labour.• Hugely detrimental effect on enterprise value.• If not then its possible to withdraw your labour and retain

ownership.• Positive effect on enterprise value.

Exit as owner

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Forced Exits – harms enterprise value• Death – Estate silo only• Sequestration – Estate silo only• Liquidation - unfriendly• Shareholder action – both Trust and Estate siloVoluntary exits – unlocks enterprise value• Sale – both Trust and Estate Silo• Bequest – Estate silo only• Liquidation - Friendly

Fairness and Feuds

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1. No 1 cause of family feuds is perception of fairness.2. Family enterprise is a fertile ground for the fairness

feuds.3. Two levels of unhappiness – intra-family and intra-

company.4. Intra family – who takes over, who is in control, who

gets shares etc.5. Intra company – family influence vs management

influence.

Relative Maturity

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Intra family fairness Intra company fairness

Rules of fairness

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• Be committed to fairness• Allow claims of entitlement to be verbalised• Give everyone a voice• Be Flexible• Be Consistent

Company Sales: Options for Retirement Sell-OffsThe tax implications

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❖ Options available:

❖ Sell the shares of the company

❖ Sell the active business assets


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Sell the shares of the company

❖ Capital gains is triggered on the sale of the shares

❖ The gain is the difference between proceeds and the base cost of the shares

❖ Base cost of pre-2001 or valuation date assets:

the sum of its valuation date value and any allowable expenditure incurred on or after the valuation date in respect of that asset.

Expressed as a formula the base cost of a pre-1 October

2001 asset is:

Base cost = valuation date value (VDV) + post-1 Oct 2001

expenditure


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Sell the shares of the company (cont.)

The base cost for valuing a share / asset

could be one of the following:

❖ Market value on 1 October 2001

❖ Time-apportionment base cost (TAB)

❖ 20% x (Proceeds – post-valuation

date expenditure)


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❖ The onus falls on the taxpayer to provide the market

valuation of the asset as at 1 October 2001

❖ The method of valuation had to be properly documented,

including

❖ Description of the asset;

❖ Factors and assumptions used to determine market value

❖ A professional valuer was not necessarily required – could be

done by taxpayer as well


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❖ All relevant business assets had to be valued;

❖ If the business was owned by a company one needed to value

all the business assets separately including intellectual property

such as goodwill;

❖ The unlisted shares of the company also had to be valued

separately.


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❖ The prescribed form CGT 2L must be completed and signed

❖ The valuation form CGT 2L , plus all supporting

documentation is to be retained for a period of five years

after the return of income reflecting the disposal has been

submitted

❖ In the case of an audit by SARS or an objection or appeal., the

documents are to be retained until the audit, objection or

appeal has been finalised.


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Information on the valuation of three categories of assets was required to be

submitted to SARS with the first tax return submitted after 30 September 2004

❖ Category of assets where then market value exceeds

❖ Intangible assets - where the value per asset R 1 million

❖ Unlisted shares - shares held by the shareholder in the company R10

million

❖ All other assets - per asset R10 million (e.g. immoveable property)

Unless the valuation was prepared as set out in the guidelines, the VDV option

will not be available, and one would be left with less advantageous options.


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Sell the active business assets

❖ Para 57(2) of the Eighth Schedule provides that a natural person

must disregard any capital gain determined in respect of the

disposal of a:

❖ a) An active business asset of a small business owned by that

natural person as a sole proprietor; or

❖ b) An interest in each of the active business assets of a

business, which qualifies as a small business, owned by a

partnership, upon that natural person’s withdrawal from that

partnership to the extent of his or her interest in that

partnership; or


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❖ c) An entire direct interest (shareholding) in a company (which

consists of at least 10 per cent of the equity of that company), to

the extent that the interest relates to active business assets of the

business, which qualifies as a small business of the company.

Up to an exclusion amount of a maximum of R1.8m


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The following requirements must all be met for the above relief to be

available:

❖ The person must have held for his or her own benefit that active

business asset, interest in the partnership or company for a

continuous period of at least 5 years before disposal;

❖ The person must have been substantially involved in the

operations of the business of that small business;

❖ The person must have attained the age of 55 years; or the disposal

is in consequence of ill health, other infirmity, superannuation

or death.


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“Active business asset” means—

(a) an asset which constitutes immovable property, to the extent

that it is used for business purposes;

There must be an apportionment of the exclusion for the non-

business portion of immoveable property such as:

• a farmhouse on a farm does not preclude the farm from being

treated as a small business

• Private living quarters above a retail space / garage


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“Active business asset” means—

(b) an asset (other than immovable property) used or held

wholly and exclusively for business purposes – there cannot

be an apportionment if the asset was used for private / personal

use at all

Stock – subject to normal income tax

Furniture and equipment – there is no capital profit on these

assets, but there may be a recoupment subject to normal tax


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‘but excludes—

(i) a financial instrument; and

(ii) an asset held in the course of carrying on a business mainly to

derive any income in the form of an annuity, rental income, a

foreign exchange gain or royalty or any income of a similar nature.

The relief is targeted at active businesses rather than

passive income producing assets, such as an investment

holding company


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“Small business” means a business of which the market value of

all its assets, as at the date of the disposal of the asset or the

interest in a partnership does not exceed R10 million.

In determining whether a business qualifies, the market value of all the

assets, regardless of their nature, must be taken into account.

Furthermore, the liabilities of the business must be ignored for this

purpose.


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❖ Partnership – valuation of all partners may not to exceed R10m, e.g. a

partnership with two equal partners of R10m each will not qualify

❖ Company – R10m market value relates to the company as a whole

and not the fractional portion to be sold

❖ The small business asset relief must be determined on an asset-by-

asset basis

❖ Where a person operates more than one small business, the market

value of the assets of the combined businesses must not exceed

R10m


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Disposal of small business assets on death

A deceased person may qualify for relief from CGT on capital gains

adding up to R1,8 million in respect of the deemed disposal of

small business assets on death. This is a once-in-a-lifetime

concession, and naturally if the deceased person had previously

made use of the concession it will not be available on that person’s

death.


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Disposal of small business assets on death (cont..)

The deceased estate is not entitled to any unused portion of the small

business asset exclusion of R1,8 million because it would not have held

the assets for at least five years, having acquired them from the

deceased person on date of death. In this regard, while the deceased

estate is treated as having disposed of an asset in the same manner as

the deceased person, it is not treated as having acquired it on the same

date as the deceased person. In addition, the date of acquisition of an

asset by the deceased person is not carried over to the deceased estate.

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Cheryl Howard qualified as a Chartered Accountant at Deloitte. Her professional career

remained with Deloitte and Kessel Feinstein (now SNG Grant Thornton) in their respective

Private Client tax departments. In 1994 she joined BoE Private Bank, managing the

Private Client, Deceased Estates and Fiduciary businesses for the Johannesburg office. In

2000 she formed her own multiple family office practice, focusing solely on high-net-

worth clients, managing their tax, estate planning and fiduciary requirements. With her

planning and business skills, on behalf of the families, she was able to work on various

venture capital and private equity project investments, from incubation, development

and management, based on the life cycles of the projects. She sold her business in 2018

to an international fiduciary company, managing their SA office until the end of 2020.

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Cheryl has both presented on and written articles for various professional bodies,

media and journals on family office planning and its dynamics. She has appeared

on TV and radio discussing various aspects of estate, tax and financial planning.

She has been a past Board member of the Fiduciary Institute of Southern Africa

(FISA) and Society of Tax and Estate Practitioners (STEP) as well as a task team

member on various SARS / Treasury projects.

Cheryl is the co-host on a monthly series of estate and financial planning for the

high-net-worth individuals for the South African Institute of Tax Practitioners.

She is currently involved in various projects ranging from training of fiduciary

professionals, venture capital and private equity investments to philanthropic

endeavours.

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wealth and family business advisory session 9

Documents