For most private groups and family businesses, succession (or transition) planning involves planning for the sale of your business or passing over control to other family members when you retire. It may include realising assets, retirement planning and estate planning. A sound tax governance framework can help you manage tax issues around succession planning.
Though succession planning may not have an immediate tax impact, it's important to include tax considerations in your plan. This will avoid unexpected tax issues arising down the track when you implement your plan.
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Transferring your business to family members
Transferring control of your business to family members may involve restructuring your business operations – changes to share structure, changes to the trustee and appointor of a trust, changes to partnership structures – or transferring assets to family members via the creation of trusts or other entities. All these events have legal and tax implications that need to be carefully considered.
For example, when you dispose of or transfer your business assets there will likely be capital gains tax (CGT) consequences. The sale of a business can also trigger liabilities in relation to GST, wine equalisation tax, fuel tax credits and excise duty.
Where pre-CGT assets are involved, you should also understand and document the tax consequences for you and your beneficiaries. Issues for consideration include whether changes in the business operations impact the pre-CGT status of the assets or shares and the availability of carried-forward losses.
Any significant changes to your business structures or operations (including any asset disposals) should be fully documented, along with their tax impact. Ensure information on your assets (such as acquisition dates and cost base) is properly documented. This will also ensure that any subsequent disposals of the assets can be treated correctly for tax purposes.
Example: Transferring your business to family members
As the owner of a successful family business, you prepared a basic succession plan many years ago, but since then your business has expanded and your children have grown up. Your son works with you in the business and you would like to see him take over when you retire.
You discuss with your adviser how best to transfer the business to your son and transition to retirement. You decide to restructure your business as a family trust, so you can still have some control of the business while reducing your involvement in the day to day operations.
Your adviser explains the tax consequences of this strategy and alerts you to other options and tax considerations. Once you decide on your strategy, you update your succession plan, which now includes a section detailing the tax treatment and tax payable on transfer.
End of example
Different strategies will have different tax consequences for the owner and beneficiaries. Consider each strategy and identify the significant transactions.
Whatever strategies you use to transfer your business onto the next generation, make sure your plans are documented and you seek advice from professional advisers where needed.
To reduce the risk of incorrect tax treatment and consequent penalties, consult published ATO guidance and advice and document the reasons for tax positions taken for any significant transactions. Where you adopt a tax treatment that differs from the published ATO view, a documented reasonably arguable position should exist.
You may also wish to engage directly with us for advice when tax issues are more complex and require certainty.
For most private groups and family businesses, succession (or transition) planning involves planning for the sale of your business or passing over control to other family members when you retire. A sound tax governance framework can help you manage tax issues around succession planning.