When he’s speaking to a family business owner who is planning to sell up or hand over control, Gavin Debono CA knows that the advice he offers can have an enormously positive effect on outcomes, for both the owner and the ongoing business.

“A CA looks at things from a holistic sense,” says Debono, private business and family advisory partner at Pitcher Partners Melbourne. 

“We tie in the tax aspects, making sure that whatever the transition looks like, we can structure it appropriately to get the very best tax outcome. We also make sure things like wills and estate plans are tied in with all of that, so all the different aspects work together.”

Tax planning in a family business begins with structure and purpose. 

It potentially means starting with the end in sight, including clear knowledge of exit or succession plans, and communication of those plans with all relevant stakeholders. 

Along the way, it quite literally pays handsomely to receive relevant advice about tax issues and opportunities.

Tax planning for successful succession

Any time there is a transfer of beneficial ownership of a business, it is a tax trigger event, Debono says.

“Around small businesses, there are quite a lot of valuable concessions that are available,” he explains. “The small business CGT concessions in particular are quite generous and, depending on meeting the eligibility criteria, can reduce any capital gains tax on an exit or restructure significantly.

“You can get discounts on CGT that might be payable on the transfer of ownership when you realise a gain. There is also rollover relief available for certain restructures, meaning you can potentially not pay any capital gains tax for the restructure.

“Also, under certain circumstances, there could be the ability to reduce the amount of CGT payable. This can be done by accessing the small business retirement exemption, which provides an ability to get some money into super without impacting the individual’s non-concessional contribution limit. So, there are quite a few avenues available for tax reduction.”

The most important ingredient in the tax management process during family business ownership transfer is a discussion with a trusted adviser such as a CA, Debono says.

“There are ways of structuring for types of succession, to transfer ownership, that have different tax outcomes and these different outcomes can be significant,” he says.

After that, it’s vital to have developed a clear image of what succession will look like. Will the owner step away completely? Will they transfer full ownership to somebody else in the family? Will they retain any level of control?

It is equally important to discuss whether the owner has sufficient assets and income outside the business to continue to support themselves.

But family business tax issues don’t just centre around ownership change.

Family business tax: Division 7A

Withdrawing profits from a business, Debono says, is usually treated quite differently in a family or private business, compared with larger or public businesses.

“Division 7A is a particular area of the tax act intended to tax the withdrawal of profits from a company structure, which occurs by way of loans rather than dividends,” he says. 

“So, if family [business] owners were to loan money out of the business for their personal use, that’s a potential trap and Division 7A kicks in.”

According to the ATO, Division 7A applies to certain payments, loans and debt forgiveness made by companies to a shareholder or an associate of a shareholder of a private company. 

“Division 7A is a trap that many business owners fall into,” Debono says. “The application of the Division 7A provisions is quite broad and extends to transactions beyond companies and individuals. For example, it extends to transactions between companies and trusts.”

This is a complex area. If you get it wrong the tax ramifications are quite punitive, he says. For example, it can result in deemed dividends, which can be unfranked. 

It is important that advice is sought from a tax adviser, and that advice is followed. In this instance, Debono explains, it could be wiser to pay the profits out as franked dividends, meaning the individual pays tax on the income, being the difference between the individual’s marginal tax rate and the franking credits that come with the dividend.

Alternatively, the funds can be placed under a Division 7A complying loan agreement, which generally requires prescribed repayments with interest, over a seven-year term.

Other considerations

Within family businesses, it is also worth watching out for expenses going through the company that could be perceived as personal in nature, Debono says.

“It’s always important to pick those up and treat them accordingly,” he says.

“Often there will be a trust involved, so having tax planning discussions prior to 30 June and resolving distributions is also an important aspect in family businesses.”

The important message with business tax planning is to speak with your adviser as early as possible and be proactive in raising your short-, medium- and long-term plans. 

“Generally, if you’ve got a long runway – if you’re able to plan over six months to a few years – then you can usually get a better outcome than if you don’t have so much time,” Debono says.

“The longer the timeframe for a change of ownership, for example, the better to enable a smoother transition commercially, practically and from a tax point of view. The benefit of time is that it gives you an opportunity to plan things in the best possible way.”