Australia is in the midst of a massive intergenerational wealth transfer with the total amount transferred expected to increase nearly fourfold between 2020 and 2050 -estimated at an average of $175 billion per year.
For many families, succession discussions often focus on who will receive or control the assets. What is often overlooked however is the hidden tax costs. Without careful planning, succession arrangements can unintentionally trigger significant tax liabilities, erode family wealth, and attract unwanted ATO scrutiny.
This could be through:
Transferring wealth
Transferring control, or
Sale or succession of your business.
Many people are often shocked, and more than a little annoyed, that well-intentioned succession arrangements trigger unintended tax consequences.
Here are some of the more common scenarios:
Donating or gifting an asset instead of managing it in your will - for example giving an investment property to one of your children - does not avoid tax.
If you transfer ownership of an asset, like property, but receive nothing or less than market value for it, the ‘market value substitution rule’ might apply. This rule treats you as having received the market value of the asset you gifted or donated when calculating any Capital Gains Tax (CGT) liability. It doesn't matter that you did not receive anything in return.
Discretionary trusts are a common structure to hold family wealth. When it comes to passing control to the next generation, succession planning generally means changing trustees, appointors or directors of corporate trustees, or amending trust deeds. If these changes are not managed in line with the trust deed or where the changes essentially break the continuity of the trust, CGT complexities can arise.
Succession planning often naturally expands the family group, for example when companies or trusts are established for the next generation. For family trusts that made a family trust election (FTE) or interposed entity election (IEE), this expansion can unintentionally trigger family trust distribution tax at 47%, if trust distributions are made to beneficiaries who fall outside the defined 'family group', even if the trust deed allows the distributions.
When looking to the future, succession planning a family business might require the owners to restructure their business or group of businesses. The options for how a movement of an interest may occur are many and varied but usually focus on the transfer of some or all of the equity held in the business over a period or at a defined point in time, and the payment of some form of consideration for the equity transferred.
This could involve transferring assets between entities, changing ownership of entities, or introducing new structures. If not carefully designed and implemented, these movements can trigger multiple taxing events, potentially limit or remove access to valuable small business tax concessions, and if it looks like any restructure is predominantly to minimise tax, bring the Australian Taxation Office’s full attention to bear.
Planning is essential to ensure that the outcome is what the business owners intended. Unintended tax consequences are not something that can be corrected or mitigated after the event.
Where companies were established prior to 20 September 1985 (before the introduction of CGT), assets, such as land and buildings acquired by the companies before that date, are generally exempt from CGT when they are sold. However, this tax-free status can be lost if the underlying interest (more than 50%) changes hands after that date. For example, this can happen when parents transfer their pre-CGT shares to their children, or when a new class of dividend access shares is issued to a new shareholder as part of succession.
If the underlying ownership interest of the pre-CGT assets changes, the assets would stop being pre-CGT assets in the hands of the company. As a result, the company would be subject to CGT on disposal of the assets.
Without proper tax planning, transfers of assets or control of an entity can trigger significant tax liabilities, such as CGT.
Well thought through and planned succession, for example, staggered wealth transfers, combined with estate planning, can achieve tax efficiency and minimise or defer tax liabilities.
Effective tax planning can preserve family wealth and maximise benefits for the next generation. Poorly planned succession can significantly erode family wealth through unintended tax consequences.
Succession planning and wealth transfers within private-owned and wealthy groups are key ATO focus areas in 2026. A succession plan that is carefully planned, properly documented and well implemented is crucial to managing ATO compliance risk.
Families and business owners planning to transfer wealth to the next generation should consider having a well-structured succession plan in place or reviewing their existing succession plan for currency.
Understanding the tax implications in succession planning is essential to identify and manage tax risk. It is paramount for families and business owners to work with professional advisers in this process. Early planning, careful timing (e.g., passing assets pre or post death), regular review of changed family circumstances (e.g., death or divorce) and adequate documentation can help protect family wealth and mitigate the risk of the ATO scrutiny.
Contact the Hayes Knight tax advice team for support.
t +61 2 9221 6666
e linda.jing@hayesknight.com.au