“Succession planning, and the tax risks associated with it, is our number one focus in 2025. In recent years we’ve observed an increase in reorganisations that appear to be connected to succession planning.” 

ATO Private Wealth Deputy Commissioner Louise Clarke

The Australian Taxation Office (ATO) has concerns that wealthy baby boomer Australians are planning and arranging asset disposals in ways that may not meet the ATO’s standards, particularly if they possess profitable family-owned businesses. 

If you are a member of the Top 500 (Australia’s largest and wealthiest private groups) or the next 5,000 (Australian citizens with net wealth of more than $50 million), you would probably expect the ATO to closely monitor the flow of funds through the entities you control.  

Many entrepreneurs are concerned with how to profit from a successful business in an effective (and legal) manner. In many cases, the owners have spent years building the company, and it has grown to be not just a significant asset but also a profitable source of revenue through dividends, salary, and the sale of shares or other assets. 

Tax law allows you to legally organise assets provided you have a valid reason, such as asset protection. However, if you go too far and the only reason for a structure is to lower taxes, the ATO may closely examine your business practices or, worse, reject any tax benefits under the general anti-avoidance rules in Part IVA of the tax regulations, which are intended to prevent “blatant, artificial, or contrived” tax avoidance.

“We’ve discovered that group leaders nearing retirement are the most active in succession planning.” According to a recent update from ATO Private Wealth Deputy Commissioner Louise Clarke, “They usually own groups that family members are a part of, and wealth is transferred to the next generation to keep it within the family (via trusts and other means).”

The following are key areas of concern:

• Resolving Division 7A loans. In other words, a business has used a lending account to pay an associate or shareholder. To remove the “loan” from the books, it is quickly settled, usually through a distribution.
• Assets moving throughout the group (occasionally the actual value of an asset is not recognised, raising the question of why the shift occurred, if not to avoid capital gains tax on sale or for some other reason. 
• Family member interests are being restructured.
• The alteration of trust deeds. 

Utilising trusts

In 2025, trusts will also be a big concern. When a trust with an interposed entity election (IEE) or family trust election (FTE) distributes money outside of the family group, it is subject to a 47% Family Trust Distribution Tax (tax at the highest marginal tax rate plus Medicare). 

Furthermore, in order to ensure that trustee beneficiary (TB) statements are completed, the ATO has recently strengthened its rules for trust tax filings for closely held trusts. Unless an exclusion applies, these are required whenever a trust transfers assets or income to the trustee of another trust.

A trust that has made an FTE or IEE, for example, is excused from submitting a TB statement. Following that, the TB statement will be matched with the beneficiary’s tax return declarations. A hefty 47% Trustee Beneficiary Non-Disclosure Tax may be triggered if a proper TB statement is not provided on time.

Mitigating risks

To avoid unpleasant surprises or missed opportunities, it is critical to thoroughly investigate the relationships between any entities you or your family own, whether in Australia or overseas, particularly if their aggregate value is significant.

Control over your business can be transferred by restructuring its activities, changing the share and appointment structures, changing partnership structures, or transferring assets to family members through the establishment of trusts or other entities. It is critical to carefully consider the legal and tax implications of each of these events. 

Please contact Bates Cosgrave if you have any questions or need assistance with your succession or tax planning.