Tax Implications to Consider when Developing a Succession Plan
Succession planning is a critical aspect of preserving the legacy and continuity of family businesses. Beyond the emotional and operational considerations, it is imperative to evaluate the tax implications associated with the development of a succession plan. The structure of business assets and their alignment with future business needs play a pivotal role in determining these tax implications.
Business Asset Ownership Structures
The first step in understanding the tax implications of a succession plan is to examine how the current business assets are owned. Different structures may include:
- Individual name/s
- Partnership
- Discretionary or Family Trust
- Unit Trust
- Company
- Self-Managed Super Fund
- Combination of the above
Additionally, it’s crucial to assess whether these structures align with the envisioned future of the business.
Tax Implications: Income Tax
- Transfer of Plant and Equipment
Transferring plant and equipment between structures can trigger a disposal at market value. Exceptions, such as rollover provisions, may apply, but it’s essential to be mindful of potential taxable profits if the market value is greater than the written down value.
- Transfer of Stock
Similar to plant and equipment, transferring stock between structures may trigger a disposal at market value, subject to exceptions like rollover provisions.
- Tax Rates
Consider the applicable tax rates based on the ownership structure. Small business companies benefit from a flat tax rate of 25%, while other companies face a rate of 30%. Individual tax rates vary from 0% to 47%, including the Medicare levy.
Tax Implications: Capital Gains Tax (CGT)
- Asset Transfer and CGT
Transferring assets between any of the listed ownership structures is a deemed market value disposal and can trigger capital gains tax. This will require an evaluation of:
-Date of asset purchase (pre or post CGT introduction in 1985)
-Cost base of the asset
-Current market value
-Potential capital gain and tax liability (market value higher than cost base)
- CGT Discount and Concessions
Consider the applicability of the CGT discount (for assets held for 12 months or more) and small business CGT concessions. Special attention is required for companies and unit trusts, where capital gains considerations may arise with the transfer of shares or units.
Tax Implications: Transfer Duty
Note that different rules apply to different states – the following information reflects legislation in Western Australia.
- Real Estate Transfer
Transferring real estate between any of the listed ownership structures triggers a deemed market value disposal for transfer duty purposes. Limited exemptions apply, with considerations such as the family farm exemption.
- Company and Unit Trust Considerations
For companies and unit trusts, transfer duty considerations arise when shares or units are transferred, and the company or unit trust holds land assets in Western Australia exceeding $2 million.
Conclusion
In conclusion, developing a succession plan requires a comprehensive understanding of the tax implications associated with business asset ownership and transfers. Seeking professional advice tailored to the specific circumstances of mid-sized family businesses in Australia is paramount for a seamless and tax-efficient succession process.
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Thorntons is an accounting and advisory practice to mid-size, family-owned businesses in Western Australia. We offer a fully integrated portfolio of financial, tax, succession, and estate planning services and have the experience to guide you through the complexity so that you can enjoy stability, peace of mind and certainty.
To discuss your individual business needs and find out if we might be a fit for you, please contact Thorntons at tp@thorntons.biz or call (08) 9421 1722.