Family Business

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Entrepreneurship keys to FB future

 ROBYN LANGSFORD  KATHERINE KARCZ

THERE is more to transition in a family business than deciding what date the leader will step down and deciding who will take over. It’s a complex task and needs a plan – not just a list of tasks but one that encompasses the business imperative, family goals and aspirations for the business’s future.

In conjunction with the University of Adelaide’s Family Business Education and Research Group we talked with seven family businesses about the critical actions for long-term sustainability. Th ree key themes emerged: succession planning, leadership diversity and entrepreneurship across generations.

Th ere is no one-size-fi ts-all approach when it comes to succession planning and certainly planning retirement based on age isn’t right for everyone. Knowing when to ‘go’ can be diffi cult and in a family business, where your connection is personal, it can be challenging. But ‘hanging in’ can be detrimental for the next generation who may not be willing to stay with no roadmap for the future.

One of the benefi ts of a succession plan is the opportunity to build diversity within the leadership. While having a family member is key in Australian family businesses and ideally the leader should be selected on merit, readiness and passion and not gender.

Th e transition plan needs to include all of the interested and capable next generation to encourage the next generation to explore and communicate their interests and commitment to pursuing a leadership role.

COVID-19 has exacerbated the caring responsibilities of work-oriented parents even further. and just as large organisations facilitate diversity by introducing fl exible working, so should a family business.

Importantly, work early to develop knowledge, skills and experience in the next generation to ensure they are prepared to step up to lead.

It is oft en said the fi rst generation creates the wealth, the second grows it and the third blows it. While this is a stereotype, it is oft en true that the greater the pool of fi nancial resources, the more risk averse and the less interest in trying to grow it.

In many family businesses the second and third generations stand to inherit signifi cant capital, and many fi nd themselves having to decide whether or not they want to be safe custodians of the wealth or wish to grow it further which may involve some risk taking.

Providing emotional and social conscious can help overcome the pitfalls of entitlement and encourage commitment among younger family members. Part of this is encouraging open dialogue where all generations have clarity around each other’s goals and values on what they want the future of the business to be.

To continue growth, family businesses need to maintain the entrepreneurial spirit that fi rst inspired the founder.

Th ere are many eff ective ways of sustaining this between generations.

Implementing formal succession plans, so all members of the family know their responsibilities now and into the future allows the next generation the freedom to develop entrepreneurship skills within the safety of an agreed plan and the safety to fail in the security of the families’ support of new ideas and ventures.

Whilst family businesses largely smoothly navigated through COVID-19 the fallout will continue for generations to come. Planned investment in these future generations will ensure the family business continues long aft er the immediate eff ects of the pandemic fade.

To read the full report visit KPMG.com.au First published by Robyn Langsford Partner in Charge, Family Business & Private Clients, KPMG Australia and Katherine Karcz, Director, Family Business and Private Clients, KPMG Australia on KPMG Newsroom on 31 May 2021.

A Budget supporting economic growth, which small and medium-sized enterprises will welcome

 CLIVE BIRD

THIS is a Budget squarely aimed at supporting growth in the economy, which small and medium-sized enterprises will welcome. There are a range of measures to encourage business investment and innovation.

Th e government has chosen to focus on growth to pay back debts rather than tax rises or spending cuts – and this is exactly what KPMG Enterprise’s pre-budget survey of our clients found they wanted.

Th ere are two main stimulus measures, which have been extended for another 12 months, which is quite a surprise but a very pleasant one. First the temporary full expensing for depreciable assets – or instant asset Write-off scheme, sometimes known as the ‘tradie tax relief’, but also available to large businesses turning over up to $5B.

Th is is a big incentive for businesses to invest in equipment and technology. More than 99 percent of businesses, employing more than 11 million workers, will be allowed to deduct the full cost of eligible capital assets until June 30, 2023, which is great news, and we are seeing a lot of interest in this.

Th e Loss Carry-Back Tax Off set which allow businesses with domestic turnovers capped at $5 billion to write off COVID19-induced losses against previous profi ts, will also be extended to include the 2022-23 income year. Its slightly too early yet to see the eff ect of this but it will be positive.

Taken together these two tax measures worth a combined $20.7 billion by 2024-25, and Treasury estimates will create as many as 60,000 jobs by the end of 2022-23.

Th ere are other welcome measures to increase Australia’s potential for innovation. Taxpayers will be able to self-assess the tax eff ective useful life of eligible intangible depreciating assets, such as in-house soft ware, patents, registered designs, and copyrights for purchases aft er 1 July 2023.

Th is will help businesses match the costs with the period in which they will benefi t, and hence will make innovation more likely. However, I expect we will see some disagreements between businesses and the ATO in terms of write off rates.

In terms of specifi c industries, a new ‘Patent Box’ tax regime will enhance Australia’s att ractiveness for investment and innovation in the medical and biotechnology industries, with a new concessional corporate tax rate of 17 percent applying to royalty/licensing income derived from Australian owned and developed medical and biotechnology patents.

Th e Government will also consider whether the measure could support Australia’s renewable energy sector. It is encouraging to see the government going down this road, where other countries currently lead the way – this marks an important step toward keeping commercialisation of Australian innovations in this country.

Th e Budget confi rms the government’s commitment to the R&D Tax Incentive but falls short of introducing quarterly credits or a new soft ware development tax incentive as recommended by the Senate. A new specialised 30 percent refundable tax off set for digital games development will be welcomed, although the $500,000 threshold on qualifying expenditure will limit its application. Despite this, changes to allow self-assessment of the depreciation of intangibles, including IP and in-house soft ware, will help reduce the eff ective cost of soft ware development and thus should help the IT industry as a whole.

I was also very pleased to see important changes to employee shares schemes which businesses have been calling for over many years.

Th is will mean that when an employee leaves a company, this is no longer automatically the point where tax kicks in. Th is will provide more fl exibility for employers and will bett er align with global practice. Th e tech sector in particular will welcome this.

On superannuation the government has provided further opportunity for Australians to boost their superannuation savings. Th ese incentives include repealing the work test for salary sacrifi ced and non-concessional contributions for those aged 67 to 74. Th e eligibility age for accessing the downsizer superannuation contribution will reduce from age 65 to 60.

In relation to self-managed superannuation funds and small APRA -regulated funds, the Government has provided a useful residency relaxation, which will allow members to continue to make contributions to the fund whilst temporarily overseas.

More generally on residency there have been a welcome and overdue updating of the rules to provide greater clarity which will encourage business leaders from overseas to come here, which can only be a good thing for Australia’s future.

Overall, this was a very positive Budget for Australia’s small to medium-sized business sector.

First published by Clive Bird, Partner, Head of Tax, Enterprise, KPMG Australia on KPMG Newsroom on 13 May 2021.

Geopolitical megatrends and business resilience

Anticipate, prepare, respond

 MERRIDAN VARRALL

RESILIENCE means the ability to persist, adapt, or transform in response to a crisis. That is, to hunker down and keep on with what you’re doing until the crisis passes, to change a few things to manage and keep moving, or to fundamentally transform your whole way of operating, overhauling business-as-usual and reshaping for future success.

Th ese responses don’t operate in isolation – you may be able to persist by absorbing some shock while you reconfi gure to adapt or transform.

A crisis can be something sudden and largely unexpected by non-experts, like COVID-19, or bushfi res, or an accident in the South China Sea that escalates rapidly.

A crisis can also be something more ongoing, like climate change. But importantly, a crisis is almost never just a tragic and random bolt from the blue – crises are both geopolitically driven, and in turn, how crises are managed has geopolitical implications.

Understanding the volatile geopolitical landscape puts businesses in a stronger position to anticipate, prepare, and respond – to be resilient.

The geopolitical crisis

Th ere are four main global geopolitical megatrends creating an environment of considerable risk for business. All of these megatrends intersect and impact each other, and all of them have been exacerbated and accelerated by COVID-19.

Megatrend 1: structural shifts in the international system

It may seem just the normal state of aff airs for us, but the international system we operate in was in fact carefully constructed. Aft er the Second World War, the victors created a system of institutions and organisations for, and based squarely on, their own philosophies and ideologies. In that arrangement, countries like China, India and Brazil simply didn’t feature as players. Th at system, imperfect as it certainly is, is now being challenged. Global economic and political power is shift ing, and the international order we have been used to is unravelling. Th e question is not so much, which state will be the leading power in the system, but rather, what kind of system will we have, and where will the various actors fi nd themselves positioned in that system?

Megatrend 2: citizen anger

Around the world, real and perceived inequality is growing.[1] In the United States, workers’ real wages have stagnated for over 20 years.[2] Th e World Economic Forum found in 2017 that income and wealth disparity, and associated social polarisation, are two of the top three trends determining the shape of the world in the next decade.[3] More and more people feel that the globalisation project has not worked for them, and/or what benefi ts there are from globalisation are being soaked up by a layer of elites who prevent the increased wealth from reaching the everyday people.[4] Th e result is a strong sense of anger and mistrust towards the establishment status quo, including political and business elites. COVID-19 is further increasing inequality.[5]

Megatrend 3: Industrial Revolution 4.0

Describing what is happening in the realm of tech, digital and cyber as ‘the Fourth Industrial Revolution’ is not over-dramatising. Th e depth and breadth of change in tech, cyber, digital and data will fundamentally change every aspect of the average Australian’s life in ways that we can’t even imagine – and indeed, already is. Th is tech disruption is supremely geopolitical – both driven by, and in turn driving, politics.

Megatrend 4: climate change

Climate change as a driver of crisis is no surprise. As Paul Dillinger, head of Global Product Innovation at Levi Strauss & Co put it, “anyone with a supply chain is going to be aff ected by climate change… It’s as much an issue for us as for the Pentagon”.[6] Direct environmental impacts are extreme weather events such as an increased incidence and severity of storms, fl oods, cyclones, bushfi res, and droughts. In February 2021, multiple severe winter storms in Texas resulted in at least 82 deaths and more than US$195 billion in property damage. Th e eff ects of the freak weather event were exacerbated by politics, namely, the state’s stance on energy deregulation, as Texas had decoupled from the national energy grids.

What does this all add up to?

Th e world is in a state of fl ux. We don’t know when things will sett le, or what they will look like when they do. We do know that nationalism and protectionism are on the rise, the line between the online world and the physical world is blurring, cybersecurity is lagging, the planet is heating up, and COVID-19 is exacerbating inequality and social polarisation. We do know that uncertainty and volatility are here to stay. Th ere is no coherent global approach on political models, trade standards, and international architecture.[7]

Now is a very good time to focus on building resilience into future strategy and operations, for those who haven’t already.

What can companies do to build resilience?

Businesses need to develop the capabilities to be able to persist, adapt or transform in a crisis – to be resilient. Th ose who can anticipate, prepare for and respond to these global geopolitical megatrends will more eff ectively navigate this less predictable world, and be in a position to capitalise on opportunities.

First published by Merriden Varrall, Director, Geopolitical Hub, KPMG Australia on KPMG.com. au on June 1, 2021.

[1] htt ps://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm [2] htt ps://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades [3] htt ps://www.theguardian.com/business/2017/jan/11/inequality-world-economy-wef-brexit-donald-trump-world-economic-forum-risk-report [4] htt ps://assets.kpmg/content/dam/kpmg/xx/pdf/2020/09/geopolitical-face-off s.pdf [5] htt ps://www.weforum.org/agenda/2020/10/covid-19-is-increasing-multiple-kinds-of-inequality-here-s-what-we-can-do-about-it [6] htt ps://capcom-ncr.com/insights/2019/clouds-on-the-horizon-what-climate-change-means-for-retail [7] Eurasia Group Top Risks 2021 htt ps://www.eurasiagroup.net/issues/top-risks-2021