Navigating succession planning

Garreth Hanley: 

This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.  

Jenny Wong:

Welcome to With Interest I'm Jenny Wong. In today's episode, we're diving into an important topic that's gaining traction this tax time season 2025, succession planning. 

Today we'll be joined by Assistant Commissioner Jenny Lin from the Australian Taxation Office, who will shed light on the current trends and regulatory aspects surrounding succession planning. 

Understanding how to navigate succession planning is crucial for accountants, financial professionals and those involved in wealth management. 

With that in mind, welcome to With Interest, Jenny. 

Jenny Lin: 

Thanks, Jenny. It's great to be here. And it's probably worth noting for the audience that we are both called Jenny. So we could maybe rename this segment to The Jenny Show. But we'll try our best not to confuse our listeners.

Jenny Wong:

I understand that succession planning is a focus for the ATO, but before we discuss why it is a focus, what does the ATO mean when they talk about succession planning? 

Jenny Lin: 

That's a great question, Jenny. Succession planning can mean different things to different people. In the context of what the ATO is focused on, we’re really looking at the process where taxpayers prepare for the sale of a family-owned business or to transfer control and wealth to the next generation.

It's not a one-time event. It can often be over a number of years, although it does sometimes get triggered by some unforeseen circumstances. And in some instances, we also see groups wanting to share their wealth with the next generation. 

Now, it can typically involve three types of transactions. Restructures, such as the creation of new entities or changes in ownership interest, the realisation of assets, or planning for retirement, which might involve the creation of new income sources or transferring assets into a self-managed super fund.

Estate planning is also a really relevant consideration here, as a will will determine the distribution of wealth and assets after someone passes away. We know every private group is different, so the range of transactions and activities will differ from group to group. 

Jenny Wong: 

Jenny, why is succession planning a focus for the ATO? 

Jenny Lin: 

So I might start with saying that succession planning itself is not a risk. It is a fact of life and is something that we really encourage private groups to think about and put in place. What we're really focused on are the tax consequences that arise from the various activities and transactions associated with succession planning.  We are seeing an ageing demographic in the private groups population, with 80% of the group heads over 50 years of age. This has resulted in an increase in succession planning activities in recent years, and we've seen this through the types of questions that people are asking in advice and guidance channels. As well as some of the errors identified in compliance activities. 

A lot of the errors that we see in compliance activities, arise due to taxpayer's not having a succession plan in place or there is a plan, but the tax consequences of those activities or that plan haven't been considered or considered in full or as a result of inadequate governance and record keeping.

We're also starting to see significant, unexpected tax consequences arising from historical decisions that private groups have made, and sometimes these were decisions made for the then and for non-tax reasons. 

You may have seen a spotlight article that Deputy Commissioner Louise Clark published earlier this year, which said that succession planning is the number one focus for private wealth this year.

So we are really focused on three things. One is addressing the issues and errors that we are seeing coming through in terms of activities that have already occurred. But, more importantly, we're really focused on providing education and guidance to help private groups make more informed decisions as part of their succession planning with an eye to the future, so that we can try to the best of our ability to prevent the unintended, unexpected tax bills from arising later down the track.

Jenny Wong: 

When undertaking succession planning, what are some of the key tax considerations private groups need to consider? 

Jenny Lin: 

Well there's quite a lot of those. But I will touch on a couple of the key ones.

Firstly, as with any disposal or transfer of a business asset, we do need to consider whether a capital gains tax event has occurred. There often might be GST consequences. And sometimes a roll over or concession may be applicable to help with reducing or deferring a tax liability. 

Good recordkeeping and documentation is critical for good governance and in instances, for example, where taxpayers may be seeking to claim pre-CGT status for an asset, it's important to ensure that the relevant documentation supporting that decision are kept, particularly if that status is going to be continued to be claimed in the future. 

Another example where documentation is important is where market valuation is required, and these must be objective and supported by evidence. 

Something that private groups don't always consider is the tax impacts for the next generation. So it's not just the immediate transaction but what does it mean once the asset or the wealth or the control is in the hands of the next generation, and this might differ and may be relevant whether the next generation chooses to continue the family business, might look to sell it, or they may seek to stop trading altogether. So it is important that the possibilities are considered in any succession plan.

And of course, in situations where private groups may want some more certainty, they can always seek advice from the ATO or from an adviser. 

Jenny Wong: 

You mentioned seeing taxpayers get it wrong. More specifically, what are you seeing?

Jenny Lin: 

Some of the more common errors that we do see include, a failure to recognise that a CGT event has occurred when transferring or disposing of an asset. Sometimes we also see a failure to review the pre-CGT status of an asset. 

We're observing a number of private groups accessing concessions or rollovers that they're not entitled to. So the small business CGT concessions can enable a private group or a taxpayer to reduce, disregard or defer certain liabilities, provided basic conditions are met. And two of the more common conditions that we see people getting wrong include the small business entity test, and that requires that the entity is carrying on a business and has an aggregated turnover of less than $2 million, or the maximum net asset value test, which requires that the net assets of an entity, the connecting entities and affiliates to be less than $6 million. 

Now, in terms of demographics, alongside an aging demographic, we're also seeing some private groups experiencing what we call rapid growth. So, your turnover or assets may have been below a threshold one year. But over the course of that year, and in into the next year, have exceeded particular thresholds.

We're also seeing, you know, market conditions causing the valuations of assets to fluctuate, which may result in entities being entitled to concessions that they might not have been in an earlier year. 

Another key focus for the ATO, unsurprisingly, will be Division 7A. And in the context of succession planning, we do see groups failing to take into account Division 7A where assets are being transferred via a loan, payment or debt forgiveness.

Something that's very topical at the moment. We're seeing distributions being made outside the family group where a family trust election or an interposed entity election may have been put in place some years ago, which is therefore triggering family trust distribution tax. 

And we're also observing the transfer of assets or income into self-managed super funds to access concessional tax arrangements via what we call non-arm's length transactions. So those are just a couple of the risks that we might be seeing.

Jenny Wong: 

Jenny, what can we do to reduce the risk of unintended tax issues that may come from succession planning? 

Jenny Lin: 

Know that succession without planning can result in unintended tax consequences. So there's a couple of things we really encourage private groups to do. Firstly, to put a plan in place. So we know every group's different, the transactions will be different, and so each succession plan will be unique and tailored to that group. It's never too early to put one in place. We do know that retirement age is getting later and later, and a lot of group heads or business owners are looking to work beyond what you and I might typically consider a retirement age. So we do encourage that a plan is put in place, which may become useful in case of unforeseen circumstances or events. 

Secondly, once a plan has been put in place, we encourage private groups to regularly review it. We know that circumstances change and life happens. So, you know, if there is a change in a family structure, relationship breakdowns, or, sadly, the death of a family member, we do encourage the plan to be reviewed and the other circumstance where we do encourage the plan to be reviewed is if there might be a change in the direction that a business is taking.

Thirdly, and very topical from in terms of what we've discussed earlier today, consider the tax consequences of that plan, and both for now and into the future, and what that might mean for the next generation, and ensure there’s appropriate documentation that is kept to support that. 

And lastly, where private groups need some more specific advice or if you're unsure, get advice from the ATO or from an adviser. 

Jenny Wong: 

Where do taxpayers and their advisers go to learn more about succession planning? 

Jenny Lin: 

As a starting point, we suggest visiting our website. You'll find that we've recently refreshed our guidance to help private groups meet their tax obligations when undertaking succession planning.

The guidance will highlight what I've discussed today and assist private groups to adopt good governance and understand the behaviours, characteristics, and tax issues that attract our attention. If you still have questions, or you need some specific advice, you can always contact us and obtain private rulings or private guidance.

And we do have our commercial deals program, which is an early engagement channel, which is post transaction and pre-lodgement where there may be a complex commercial deal that's being undertaken through which we can provide some more certainty. 

Jenny Wong: 

It's clear that succession planning is a vital discussion for anyone handling wealth transition. Are there any other key messages? 

Jenny Lin: 

So in closing, I probably just want to reiterate that succession without planning can result in unintended tax consequences, and we want to prevent this happening and help groups make more informed decisions with an eye to the future. So to help reduce the risk, we do encourage private groups to put a plan in place, review it regularly, consider the tax consequences and seek advice from the ATO or an adviser where needed.

Jenny Wong: 

Well, thank you so much for joining us today, Jenny. Your insights have been incredibly helpful and enlightening. So thank you. 

Jenny Lin: 

Thanks, Jenny.

Jenny Wong: 

And thank you for listening to With Interest. Don't forget to check the show notes for links and resources from CPA Australia and the idea on succession planning. If you enjoyed this episode, please share it with your friends and colleagues and hit the subscribe button so you don't miss future episodes.

Until next time, thanks for listening. 

Garreth Hanley: 

You've been listening to with Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover with interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. And we hope you can join us again for another episode of With Interest.