The succession problem every Perth owner eventually faces
You are 58. You built an engineering business in Osborne Park over twenty years, it turns over $70 million, and your general manager has run it day to day for the last eight. He wants ownership, not another bonus, and you want him locked in for the next decade. The generous start-up tax concessions that help young companies give staff equity are long gone: your company is too old and too big for them. If you simply hand him discounted shares, he pays income tax at marginal rates on value he cannot sell. That is not a reward. That is a bill.
Under a loan-funded share plan, your GM buys shares at market value, funded by a loan from the company. The loan is usually interest-free and limited recourse: dividends and bonuses are applied against the balance, and if the shares ever end up worth less than the loan, he hands the shares back and the debt is settled. He gets ownership with his downside capped. You get a successor with real skin in the game, without him writing a cheque and without you giving anything away.
What the numbers look like
Your GM buys 10% of the company for $500,000, its market value, in August 2026, funded entirely by an interest-free limited recourse loan. Over five years, franked dividends net of his tax reduce the loan by $150,000. The business is then sold and his stake fetches $1.2 million. He repays the remaining $350,000, leaving $850,000 before tax.
Under the CGT rules as they stood before the 2026 reforms, his $700,000 gain would be halved by the 50% discount, with tax of about $164,500 and roughly $685,000 in his pocket. But a plan starting now crosses the 1 July 2027 reform date, so the gain is split. Assume his stake is worth $600,000 at 30 June 2027. The $100,000 accrued to that date keeps the 50% discount: tax of about $23,500. The $600,000 accrued afterwards is taxed under the new rules: his $600,000 reference value is indexed for inflation, say to about $660,000 on illustrative CPI of 2.5% a year, leaving a real gain of about $540,000 taxed at his 47% rate, roughly $254,000. Total tax of about $277,000 and about $573,000 in his pocket, having outlaid nothing on day one. The figures are illustrative, but the point is not: the reform materially changes the outcome, and both regimes must be modelled before the stake is priced.
That is the plan working. Here are the six gates it must pass.
Gate One: genuine market value
The intended tax treatment depends on your GM acquiring the shares for genuine market value. If the consideration is less than market value in substance, there is a discount, the employee share scheme rules apply after all, and he faces income tax at marginal rates instead of a capital gain.
The valuation must reflect the rights actually attached to the plan shares and the commercial effect of the loan, the limited recourse protection, the leaver terms and any compulsory transfers, and it must be documented well enough to survive an audit years later. This is harder again if you create a separate class of non-voting shares for the plan.
Gate Two
A company loan funding the purchase of its own shares is financial assistance under the Corporations Act. Before any tax design, the board and its lawyers must determine whether the assistance causes no material prejudice to the company, its shareholders or creditors, whether shareholder approval and ASIC filings are required, or whether an employee share scheme exemption applies. Division 7A compliance does not make unlawful financial assistance lawful. This gate is routinely missed in plans designed around tax alone.
Gate Three: Division 7A sequencing
Division 7A treats loans from a private company to its shareholders, or their associates, as unfranked dividends unless an exception applies, and it catches a loan made to someone who is already a shareholder or associate when the loan is made. So the design rule is: make the loan before your GM holds a single share. A loan funding his very first parcel generally sits outside Division 7A. He has one straightforward first-acquisition window; any later top-up loan needs a fresh Division 7A analysis and should not be assumed to get the same treatment. Check the associate point too: if his wife or family trust already holds shares in your company, he may be caught before the first document is signed.
Can you instead put the loan on complying Division 7A terms? Yes, but complying terms often destroy the commercial purpose of the plan. An unsecured complying loan requires interest at the benchmark rate, 8.77% for FY27, resetting each July, plus minimum repayments every year for seven years; a 25-year term is available only with qualifying real property security. His shares are illiquid, so he has no way to fund the repayments except from salary, and within a year or two he will be asking to hand back shares instead of paying cash, which raises complicated and largely untested questions. You do not want your succession plan to be the test case.
There is a partial safety valve: a deemed dividend is capped at the company’s distributable surplus, broadly its net assets per the accounts, and the ATO has indicated in private rulings that it will not inflate that figure where the plan is a genuine incentive. That is comfort, not immunity.
Gate Four: FBT and payroll tax
An interest-free loan to an employee is a fringe benefit, but its taxable value may be reduced, potentially to nil, under the otherwise deductible rule where he would have been entitled to deduct the corresponding interest. That depends on a genuine expectation the shares will pay dividends and on the shares being held by him personally: the rule does not work for shares held by his family trust, so if he asks to put them in his trust, the structure needs rethinking, not accommodation. On WA payroll tax, a grant at full market value should produce little or no taxable value on the shares themselves, unlike discounted share grants, but confirm this against your payroll tax position as part of the design.
Franking credits
If the company pays franked dividends on the plan shares, there is a genuine question whether your GM can use the credits. He must hold the shares sufficiently at risk for at least 45 days, and a limited recourse loan reduces the risk he carries, because he can always walk away. If the plan requires dividends to be swept against the loan, the related payment rules add a further layer. A small shareholder exemption can help where his total franking credits for the year are modest, but it does not solve every issue. The ATO has answered the risk question both ways in edited private rulings, which cannot be relied on by other taxpayers. If franked dividends are part of what makes the deal work, resolve this at design stage, not after the first dividend.
Gate Six: exit and accounting
Draft the leaver terms early, and model transfers, call options, compulsory transfers, cancellations and buy-backs separately: an off-market buy-back can split proceeds between dividend and capital components and may be inferior, but the result depends on the company’s accounts, share capital and the transaction terms. If your GM ever walks away under the limited recourse feature, his cost base in the shares is reduced, so the downside protection is not free.
One more thing owners rarely expect: the accounting can treat the whole plan as an option grant rather than a loan and shares, because the loan’s recourse is limited to the shares. That changes the expense recognised, EBITDA, covenant calculations and completion accounts on a sale. Agree the treatment with your auditor before implementation, not after.
Common questions
Careful. If a subsidiary lends using cash from a parent with retained profits, anti-avoidance rules can still deem a dividend. The funding path matters as much as the loan.
A properly documented bare nominee can keep the register clean and simplify a future sale while preserving his beneficial ownership, but it still needs checking for tax, franking, payroll tax and Corporations Act purposes.
Longer than you think, because the financial assistance position, valuation, plan rules, loan agreement and leaver terms must all be in place before the loan is made, and the order cannot be corrected afterwards.
Thinking about staff equity? Talk to us before anything is signed.
If a staff buy-in or succession plan is on your mind for the next year or two, involve Westcourt before anything is promised or signed. The first step is a defined piece of work: a valuation approach, Division 7A sequencing and financial assistance review, with the after-tax outcome modelled under both CGT regimes. The plans that fail are the ones where the adviser was called second.
This is the second article in a three-part series on staff equity for Perth private companies. Part one covers the start-up concessions for younger companies, and part three covers premium priced options, contractors and family office plans.
Key legislation and guidance: Division 7A of the Income Tax Assessment Act 1936; Division 83A of the Income Tax Assessment Act 1997; section 260A of the Corporations Act 2001.
Australian and Western Australian law current at 10 August 2026.
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