What the ATO wants to know about your family’s succession plan

“Many business owners underestimate the complexity of succession planning. Without a clear strategy, families can face unexpected tax liabilities and governance challenges,” says Matt Donat in a recent article in the Australian Financial Review.

A decade or so ago, entities in the Moloney family group – which operates a Victorian company called Mt Noorat Freighters – were restructured for succession planning purposes.

This involved the $3.5 million sale of the business from one trust in the family group to another.

The valuation was arrived at by an independent valuer, and because it was under $6 million, the trust’s beneficiaries were able to claim small business capital gains tax (CGT) concessions, which effectively reduced the tax payable on the transfer to zero.

But the Australian Tax Office was sceptical of the valuation, and challenged the tax position, arguing that the business had sold at below-market rates. Its valuers found the business was worth $10.6 million.

The Moloneys appealed the ATO’s decision, and new valuations were sought for the appeal. This time the Moloney’s valuer ascribed a value of $3 million compared to the ATO’s new valuation of $7 million.

The Moloneys won the appeal in 2024, with the Administrative Appeals Tribunal landing on a valuation of just over $4 million. Had they lost, they would have been ineligible for small business CGT concessions and faced a large tax bill.

As this case illustrates, the valuation of private assets can be fraught, and it’s just one of the challenges facing family businesses looking to pass wealth on to the next generation, which is currently the focus of an ATO crackdown.

While the ATO is primarily targeting the top end of town, there are implications for family businesses of all sizes, says ATO private wealth deputy commissioner Louise Clarke.

Why is the ATO looking at this now?

The ATO has noted the average age of the individuals who head up private wealth groups controlling $5 million or more is 67, and it has seen “an increase in reorganisations that appear to be connected to succession planning”, Clarke says.

This has led to the late filing of tax returns and an increase in requests for private tax rulings. Of particular concern to the Tax Office is:

• how Division 7A loans are settled;
• how assets are moved around family groups;
• how family member interests are restructured;
• how trust deeds are amended.

The ATO wants to ensure that as assets are passed on, they are properly valued, accounted for, documented and assessed for tax.

“The main reason why the ATO is so focused is because of the cash that’s starting to move through the system,” says Jonathan Ortner, taxation group partner at Arnold Bloch Leibler and co-chair of the ATO’s private groups stewardship group with Clarke.

Succession planning

Ortner says succession planning can be as simple as “someone passing away, and the assets forming part of their estate then passing to the beneficiaries under the will”.

But on the flipside, it can be as complex as “having to restructure a complex family business and group to allocate who has control over what entities and what assets are being sold”.

Matthew Donat, a high-net wealth adviser and partner at Koda Capital, says many of his clients are ageing founders, with around two-thirds looking to exit via a sale and the remaining third wanting to pass the business on to their heirs.

He reminds clients heading down the succession route that passing their business on within the family still constitutes a sale of sorts, which may give rise to a taxable event for all parties involved.

In his experience, it’s not that founders “don’t want to pay the tax — they don’t understand why they should pay the tax when the business hasn’t ultimately sold”.

“In most privately owned wealthy groups, they don’t own the assets individually,” BDO tax partner Mark Molesworth says. Instead, there are typically a number of entities involved such as companies and trusts, and it is here that financial affairs become complex.

Division 7A loans

Among the ATO’s concerns is how Division 7A loans, which are loans between related entities or their shareholders or associates, are settled.

“Over the years, there may have been intercompany or inter-entity loans, or a group may have lent out money to family members who are shareholders in companies in the group,” explains Julian Cheng, partner and head of tax at Gilbert and Tobin.

Under Division 7A tax rules, such loans may be considered dividends, which need to be included in income tax assessments.

As part of succession planning, these loans are sometimes forgiven or waived, in which case, Division 7A tax may also apply.

Movement of assets

Any time there is a change to the ownership of an asset it can give rise to a taxable event, with income or capital gains among the taxes that may be payable. As seen in the Moloney case, valuations ascribed to assets are key, as are the age of the assets.

Other than cash gifts, assets will need to be attributed a market value, which is where the situation can become complex.

“An important matter illustrated by this case is that if related parties want to claim that they are dealing at arm’s length, they will need more than an independent valuation – they will need to show a pattern of real bargaining as to the terms of their agreement,” Molesworth says.

“The tax office is certainly looking to challenge market values that are applied to these transactions,” Ortner agrees, advocating for the use of professionally qualified valuers.

Whether CGT is payable is another potential issue.

In simplistic terms, if an asset was acquired before 1985 it would be assumed to be exempt from CGT upon its transfer or sale. However, this may not always be the case.

“To the extent that there’s been a change of ownership in the company [that owns the asset] of more than 50 per cent … or if there’s been amendments to the trust deed, which might mean there’s been an effective change of ownership, then suddenly that asset may no longer be tax-free,” Ortner says.

Restructuring of family member interests

The ATO is also targeting the restructuring of family member interests within family group structures.

Cheng describes the ATO’s focus on this area as “quite general”, but says that “out of any succession plan, there could be changes in the ownership of companies, trusts and other entities in the family group, just moving down to one or more members of the next generation”.

“Some members of the family may or may not want an interest in that entity going forward, some of them might want to live their own lives and some of them might have no interest in owning or carrying on a business that has been established by the head of that family group some time ago,” Cheng says.

Any such changes may trigger a taxable event.

Amendment of trust deeds

Cheng says many family groups use discretionary trusts (also known as family trusts) to structure their affairs because “the trustee has an ability to choose who it distributes income to within a class of beneficiaries”.

Common succession-related changes to trust deeds include amending vesting dates or changing beneficiaries. A vesting date is the date at which a trust ends.

Cheng says passing control of a discretionary trust onto the next generation can be as simple as changing the trust deed. But if the changes are substantial, the old trust could be considered to have ceased and have been replaced by a new trust, which would trigger a tax event with the resettlement of assets.

“Whether a trust can actually be amended or not depends on the power within the trust deed, and the wording of that power can be quite specific,” says Emily McKeith, senior tax adviser at Speed and Stracey Lawyers.

“Even if there’s a power to vary some of the terms of the trust, it’s not always the case that every single term or power or provision can be amended.”

For trusts that were established many years ago, vesting dates are another factor to consider, says McKeith. Most family trusts vest after 80 years, which would also trigger a tax event when ownership of assets is passed to a new trust.

She says some clients wish to move their family trusts to South Australia – which has no vesting rules – or Queensland, where the vesting date has been extended to 125 years.

“With that, a number of our clients are seeking to obtain private binding rulings in order to get protection in migrating their trust. It’s definitely something that’s not a quick fix – it’s something that needs to be thought through and implemented properly.”

Get help

McKeith says the risks in changing trust deeds can be “quite substantial”. “If you inadvertently resettle the trust, or if the amendments were ineffective, then it can have quite severe tax consequences,” she says.

“There’s a reason that tax professionals have their jobs, and it would be a brave privately owned group that undertook a restructure, whether for succession planning or other reasons, without obtaining comprehensive tax advice,” Molesworth says.

Cheng agrees. “Anyone thinking about any type of succession planning or transferring assets or wealth to the next generation really needs to be getting advice on how to do that tax effectively and without tripping up on any tax laws.”

But not all advisers are created equal, and Donat says there may be a risk if a family group is still using the local accounting firm that helped them first set up their business.

“They may be the biggest client of a small suburban firm, where they may not have any other clients who are dealing with this. The ATO would probably have a little bit more comfort if a client is part of a top accounting firm.”

Molesworth says it is also helpful to have your lawyer, accountant and financial adviser involved in succession planning from the beginning.

“In reality, what you need is all of those professionals in the room at the same time so that the legal plan, the tax plan, the accounting plan and the financial plan are developed concurrently and work together.”

Plan ahead

Planning for any succession-related restructuring should take place well in advance of tax time, so that tax issues can be resolved to avoid the kind of lodgement delays the ATO wants to address.

Molesworth says planning ahead is much better than having to be reactive.

“Having to put the restructure in place because there’s suddenly a life event that means it’s very urgent right now is where many taxpayers run themselves into trouble, because taxpayers and their advisers don’t have the time to think through all of the tax consequences.”

Read the article here: AFR – Succession Planning.