Planning for Business Succession
Business Succession Planning: Safeguarding Your Business, Legacy and Wealth
Family and small-to-medium enterprises (SMEs) form the backbone of the Australian economy. However, a significant majority of business owners operate without a formal business succession plan. Without a clear strategy, events such as retirement, illness, or death can freeze commercial operations, trigger severe Capital Gains Tax (CGT) debts, or spark damaging family disputes.
This blog post outlines the key legal and structural issues in business succession planning and details the valuable tax concessions and deferral mechanisms available under Australian tax law.
Assets Ownership v Legal Control
A critical misconception among business owners is that their Will automatically passes their business assets to their chosen successors . Under Australian law, the legal form of your business structure dictates how succession occurs:
Discretionary Trust Assets
Assets held in a discretionary family trust do not personally belong to you and cannot be gifted in your Will . Because trust assets sit outside your deceased estate, succession is achieved by transferring control of the trust entities, rather than the underlying physical assets.
Company Assets
Property owned by a proprietary company belongs to the corporate entity. Your Will can only distribute the shares you personally hold in that company.
Understanding the Three Levels of Trust Control
When a business operates via a family trust with a corporate trustee, control resides across three distinct levels:
The Appointor (Ultimate Control): Holds the unilateral power to remove and appoint the trustee. Transitioning this role (via a lifetime deed or specific nomination) is the single most critical step in trust succession.
Corporate Trustee Shareholders: Own the shares in the corporate trustee and hold the voting power to elect or remove directors.
Corporate Trustee Directors: Manage day-to-day commercial operations and exercise absolute discretion over annual profit and capital distributions.
Navigating Family Dynamics
Passing a business to the second generation involves balancing commercial continuity with family harmony. Key structural risks and protective solutions include:
The Sibling Outvoting Trap
Passing equal joint control (as co-directors or co-shareholders) to multiple children can be dangerous. Because company rules default to majority voting, and discretionary trust beneficiaries have no guaranteed entitlement to trust funds prior to a formal trustee resolution, a majority faction can vote to outvote and lock out a minority sibling.
Active vs. Non-Active Children
When a family business represents the bulk of a parent’s wealth, balancing entitlements between children working in the business and non-active siblings requires careful structuring. Solutions include:
Equity Equalisation Clauses: Allocating non-business estate assets (or life insurance proceeds) to non-active children to balance the business equity passed to active children.
Vendor Buy-Out / Payout Mechanisms: Granting active children the right to acquire business equity subject to paying out non-active siblings over an agreed timeframe with commercial security.
Protective Governance Mechanisms:
Tailored Constitutions: Replacing standard replaceable rules with special majority or unanimous voting quorums for major capital or distribution decisions .
Joint Appointors & Independent Guardians: Mandating that joint appointors act unanimously or appointing an independent professional as a “guardian” with veto powers over major distributions.
Family & Shareholders’ Agreements: Establishing binding operational guidelines, director salary frameworks, and dispute resolution mechanisms
Tax Concessions and Deferrals
Restructuring or transferring a business does not have to result in prohibitive tax liabilities. Australian tax law offers two primary regimes to manage transaction costs:
1) Small Business Restructure Rollover Relief (S 328-G ITAA 1997)
Subdivision 328-G allows small business owners to transfer active assets (including CGT assets, trading stock, revenue assets, and depreciating assets) between legal structures (e.g., from a sole trader or partnership into a discretionary trust) with the tax liability deferred.
Please see our other blog post for a more detailed look at the Small Business Restructure Rollover provisions.
2) Small Business CGT Concessions (Div 152 ITAA 1997)
When selling or transferring business equity upon exit or retirement, Division 152 provides four valuable concessions to reduce or eliminate taxable capital gains :
1) 15-Year Exemption (Subdiv 152-B)
Completely disregards capital gains if the asset was owned for 15+ years and the disposal connects with retirement (if aged 55+). Proceeds up to $1.565m can be contributed to superannuation.
2) 50% Active Asset Reduction (Subdiv 152-C)
Automatically reduces the assessable capital gain by 50% (in addition to the general 50% CGT discount for individuals/trusts).
3) Retirement Exemption (Subdiv 152-D)
Disregards up to a lifetime limit of $500,000 in capital gains. If under age 55, proceeds must be rolled into a complying super fund.
4) Small Business Rollover (Subdiv 152-E)
Defers CGT for up to 2 years (or indefinitely if a replacement active asset is acquired).
3) Tax Effective Control Variations
Where a business is held in a discretionary trust, transferring control by changing the Appointor or corporate trustee directors generally does not trigger Capital Gains Tax or stamp duty.
Under ATO Determination TD 2012/21, administrative variations made pursuant to a valid power of amendment maintain trust continuity and avoid a costly resettlement,
How Eastern Hill can help
Successful business succession requires seamless coordination between legal structure, tax rules, and family dynamics. At Eastern Hill, our succession law specialists assist clients by:
Entity & Deed Audits: Reviewing trust deeds, company constitutions, and financial statements to eliminate structural vulnerabilities.
Governance Drafting: Implementing tailored corporate constitutions, joint appointor clauses, family agreements, and Buy/Sell agreements.
Restructure & Tax Alignment: Structuring lifetime transitions using Subdivision 328-G rollovers and Division 152 CGT concessions in close consultation with your accountant.
Estate & Incapacity Integration: Aligning Wills, Enduring Powers of Attorney, and Superannuation Binding Nominations with your business entities
Disclaimer: This blog post is only for general educational purposes only and does not constitute legal or taxation advice. Business structures and tax laws vary based on individual circumstances and require careful consideration before embarking on any change in business structure.
