As wealthy individuals continue analysing new tax changes for 2017, the focus is on understanding the long-term impact of the increase in the dividends tax rate from 15% to 20%, on their family businesses.
Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank, says “although wealth planning for business owners should not merely be based on tax considerations, the increased dividend withholding tax has a direct impact on estate planning, investments, as well as the overall growth and sustainability of wealth for future generations.”
Enslin has identified key considerations that high-net worth families need to deliberate with their advisor pertaining to the increase in dividends tax, which came into effect on 22 February 2017:
1. How will family businesses navigate the Dividend Withholding Tax Policy?
It is crucial that family businesses have a carefully considered dividend policy, which will enable them to adapt to legislative and economic changes.
National Treasury commented, in the 2017 National Budget Speech, on transactions that have and are taking place to interpose companies amid existing tax structures, to circumvent the section 7C provisions of the Income Tax Act, this will result in the scope of the section 7C anti-avoidance measure being extended. We therefore wait for the draft tax legislation for more clarity in this regard. A more appropriate approach however, for a family business in these circumstances could be to rather re-invest within the existing group structure.
“Family businesses that opt to reinvest profits instead of paying dividends, as a form of cash flow to investors or shareholders, may benefit in the long-term, but such a decision will need to be based on the strategic vision and objectives of the business. This highlights the need for a transparent dividend policy, which will ensure that all shareholders are satisfied with the decision taken,” explains Enslin.
2. How will this impact the business exit strategy?
Many wealthy families venture into business opportunities with the sole aim of selling the enterprise as an alternative way of building wealth. The structure of the business and the exit strategy will inevitably result in tax consequences. Well established family businesses need to consider capital and equity stakeholder expansion; as well as diversification, whilst taking the tax consequences, BEE and cash resources into account. The expansion plan and the new diversification strategy may also need to be considered with the exit strategy of the founders.
3. Are family businesses utilising the applicable Dividend Withholding Tax exemptions?
It is essential that a family works with their advisors to ensure that the dividends tax exemptions that are applicable to their businesses are being utilised.
Whilst the tax burden for high-net worth families is broader than dividends tax, families that have carefully considered their long-term investment and wealth creation strategy, underpinned by relevant tax and compliance policies, can rely on this as a building block to assist them in attaining inter-generational wealth preservation.
“The on-going changes in tax legislation means that it is vital for high-net worth individuals and families to constantly review their legacy and wealth strategies, utilising the knowledge, expertise and guidance provided by their trusted wealth advisors,” concludes Enslin.