5 Tax Strategies and the Traps in Each
Most private business owners leave succession too late. They wait until they are ready to step back, then discover that the tax cost of transferring ownership has been building for years — and that the cheapest pathways closed because nobody planned for them.
Succession is not only a retirement decision. It is often a tax event. Every transfer of ownership is potentially a capital gains tax (CGT) event, or a deliberate decision to defer one. The strategies below are some of the common solutions some private business owners use. Each pathway also has a trap that can change the tax result.
This blog outlines 5 possible tax strategies private business owners can use for the succession of the business to the next generation.
Transfer on Death
Death is the simplest CGT event to plan around, because in most cases it is not a taxing event at all. Where an asset passes from a deceased person to a beneficiary or to the legal personal representative, a rollover applies. The capital gain is not taxed on death; it is deferred until the beneficiary later sells.
For assets acquired on or after 20 September 1985, the beneficiary inherits the deceased’s cost base. For pre-CGT assets, the beneficiary is treated as acquiring the asset at its market value on the date of death. That is a real benefit — but note what it also does: it ends the pre-CGT status.
Wills & Trusts
A will can deal with shares in a company. A will cannot deal with assets held inside a discretionary trust. If the business sits in a trust — and many do — the will is close to irrelevant. What happens on death is governed by the trust deed and by who holds control. Owners who rely on a will to pass on a trust-owned business have not made a succession plan. They have made a document that does not reach the asset.
Updated Legislation
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The government’s new change to capital gains tax might also be the end of pre-CGT assets – but we will need to see the legislation on that.
Sale of Shares — and the Pre-CGT Question
Selling shares to the next generation is the most direct transfer. The parent is paid for the business; the children get a clean ownership interest. Where the children cannot fund it, the parents commonly lend the price and are repaid from future profits.
A sale of shares is a CGT event. If the sale is to a related party and not at arm’s length, the proceeds are deemed to be market value — the price actually paid does not control the tax outcome. The general 50% CGT discount may apply where an individual or trust has held the shares for at least 12 months.
Pre-CGT Assumption
The trap is the pre-CGT assumption. Shares acquired before 20 September 1985 can in principle be sold without a CGT liability on the gain. But pre-CGT status is fragile. Division 149 of the ITAA 1997 sets out when a pre-CGT asset stops being pre-CGT — broadly, when the majority underlying ownership changes. Over decades of family shareholdings, deaths, share issues and restructures, that test is often failed without anyone noticing. Separately, assets held inside the company may have lost pre-CGT character even where the shares have not.
Guidelines
If you are claiming the pre CGT status of an asset, you should have a clear file note documenting the assets ownership history and CGT events that occurred to the asset while keeping the pre-CGT asset. Do not act on a belief that a parcel of shares is pre-CGT. The ownership history has to be traced and documented, and the Division 149 position confirmed, before the sale is structured. A sale built on a wrong assumption produces a tax bill that nobody budgeted for.
Division 149 is not the only pre-CGT trap. CGT event K6 also needs to be checked where pre-CGT shares or trust interests are sold and the underlying company or trust holds substantial post-CGT property. A shareholder can believe the shares are tax-free because they are pre-CGT, but still have a taxable capital gain under K6.
Real-world Example
Mum acquired shares in Trading Co before 20 September 1985. She wants to sell them to her daughter for $1, with the balance treated as a family arrangement. The tax result is not based on the $1 price. The market value substitution rule must be considered. The pre-CGT status of the shares must be traced under Division 149. CGT event K6 must also be checked if Trading Co holds substantial post-CGT property. A transfer that looks simple commercially may not be simple for tax.
Convertible A-Class "Flowering" Shares
This suits a founder who wants the next generation to get the future growth in the business, but is not ready to hand over current value or control.
The company restructures its share capital. The founder keeps shares carrying the existing value and the votes. A new class — often called A class — is issued to the children or to a trust for them. At issue, these shares carry limited rights: little or no voting power, and a small entitlement to capital and income. Because they are worth little at that point, they can be issued for a modest amount with limited CGT cost to the founder.
Explaining the Growth
The shares are “flowering” because, on a defined future trigger — a date, a milestone, the founder’s retirement — their rights expand to full economic and voting entitlements. Growth from the date of issue accrues to the next generation; control stays with the founder until the trigger.
The trap is valuation. If the ATO later forms the view that the A-class shares were issued at an undervalue — that value was shifted from the founder’s shares to the children’s — Division 7A, the deemed dividend rules, or the value-shifting provisions can apply. The terms must be set out clearly in the company constitution and the share issue documents. The valuation at the date of issue must be defensible and supported by contemporaneous evidence. This is a structure that works, but only when it is implemented properly and documented at the time, not reconstructed later. It is not a do-it-yourself exercise.
Small Business CGT Concessions
For many private businesses, the Division 152 small business CGT concessions are the most valuable tool available when succession involves a sale.
There are four: the 15-year exemption, the 50% active asset reduction, the retirement exemption, and the small business rollover. Before any of them is available, the basic conditions must be met — broadly, either the $6 million maximum net asset value test or the $2 million aggregated turnover test, and the active asset test on the asset being sold. Where the asset is a share in a company, further conditions apply, including the CGT concession stakeholder and 90% participation tests.
The 15-year exemption is the one most relevant to succession. Where the owner is at least 55, the sale relates to retirement, and the asset has been owned continuously for at least 15 years, the whole capital gain can be disregarded. The retirement exemption can exempt up to a lifetime limit of $500,000, with contributions to superannuation required in some cases depending on age.
The trap is timing. Eligibility for these concessions is decided by facts established years before the sale — age, how long the asset has been held, whether it has genuinely been an active asset, and how the share and trust conditions are satisfied. The thresholds, rates and limits above must be confirmed against the current law before any advice is finalised. The point for owners is simpler: a succession plan that starts twelve months might have already lost the ability to enjoy the concessions. This planning belongs years ahead of the transfer.
Changing Trustee and Appointor Roles
Many private businesses are not owned by people at all. They are held inside a discretionary trust. For these, succession is not about transferring shares. It is about transferring control.
Control of a discretionary trust sits in two roles. The trustee runs the trust and decides distributions. The appointor — sometimes principal or guardian — can remove and replace the trustee. Whoever controls the appointor controls the trust. Succession through a trust means moving these roles to the next generation: appointing them as directors of the corporate trustee, and transitioning the appointor power to them.
Done correctly, this is the most tax-efficient pathway of the five. Changing who controls a trust is ordinarily not a CGT event. The trust still owns the business assets; only the people in control change. No disposal, no capital gain.
The trap with changing trustee roles is the risk of resettlement. If the changes go far enough — to the deed, the beneficiary class, the trust property — the ATO may treat the trust as a new trust. That triggers CGT and transfer duty on the underlying assets: the precise outcome the strategy was meant to avoid. The trust deed governs how the trustee and appointor can be changed, and the deed must be followed exactly. The original deed and every variation since must be reviewed first. The appointor succession on death must be dealt with expressly — an unaddressed appointor power is a common source of family disputes after a founder dies.
Before You Act: A Checklist
These strategies can combine in different ways to create outcomes tailored for each succession.
A typical plan moves trust control to the next generation while the founder is alive, issues flowering shares in the operating company, applies Division 152 on the sale of a particular asset, and uses the will for whatever is held personally.
Before committing to any of it:
- Confirm whether the business is held by individuals, a company, or a trust. This determines which strategies are even available.
- Trace and document the pre-CGT status of any older shares or assets against Division 149 — do not assume it.
- Confirm the Division 152 basic conditions, and check the current thresholds, rates and lifetime limits against the law as it stands.
- For flowering shares, obtain a defensible valuation at the date of issue and keep the evidence.
- For any trust change, review the original deed and all variations, and confirm the change does not cause a resettlement.
The focus on this article is also on different tax tools in the succession of a private business. The commercial mechanics, family issues and the estate planning associated with transfer is a different topic that needs its own consideration and thought – often those issues are much larger than the tax outcomes.
The right succession outcome depends on your entity structure, your asset history and your timing. Speak to Westcourt before you act — and ideally several years before you intend to step back, because the cheapest pathways depend on conditions that cannot be created at the last minute.
Frequently Asked Questions
Sometimes, but not always. The answer depends on what is being transferred.
A sale or gift of shares, business assets or units will usually be a CGT event. If the transfer is between family members and not at market value, the tax law may still treat the transfer as happening at market value.
There may be better outcomes where the business is held through a trust and control is changed without transferring the underlying assets, or where the transfer happens on death and a CGT rollover applies. The structure matters before the strategy can be chosen.
Shares acquired before 20 September 1985 may still have pre-CGT status, but that status should not be assumed.
The ownership history needs to be traced. Share issues, deaths, transfers, restructures and changes in majority underlying ownership can affect the answer. Division 149 needs to be checked, and CGT event K6 may also need to be considered where the company holds substantial post-CGT property.
If pre-CGT status is wrong, the tax cost can be materially different from what the family expected.
The government is also looking at pre-CGT assets and removing the grandfathering.
A change of trustee, appointor or directors of a corporate trustee will not usually trigger CGT if the trust deed allows the change and the same trust continues.
The risk is that the changes go too far. If the deed, beneficiary class, trust property or trust obligations are changed in a way that creates a new trust relationship, there may be a resettlement risk. That can create CGT and transfer duty issues.
The original trust deed and every later variation should be reviewed before any change is made.
Yes, they can be very valuable. In the right facts, the Division 152 concessions can reduce or eliminate the capital gain on the transfer or sale of a business asset.
The difficulty is eligibility. The rules are complex.
These concessions usually depend on facts built up over many years. They are difficult to fix at the last minute.
They can be, but only where they are properly designed and documented. They are complex to draft and implement properly.
Flowering shares can allow the next generation to receive future growth while the founder keeps current value and control for a period. The trap is valuation. If the new shares are issued for less than their real value, or if value is shifted from the founder’s shares to the children’s shares, the tax outcome may be very different from the intended result.
The share rights, company constitution, valuation and commercial purpose all need to be clear before the shares are issued.
Talk to Westcourt Before Your Succession Plan Is Set
We’ll tell you which pathways are still open, not just how to structure the transfer. Importantly, the highest value advice we deliver is before ownership changes hands. Share your entity structure, asset history and intended timeline with us. We will tell you whether the strategy works, what the structure should be, and how far ahead you need to start planning.
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