Australia: Family business succession: When to pass control? Watch out for tax and duty traps.

Last Updated: 23 April 2017
Article by Kylie Wilson

A common question for family business succession, and particularly for primary production family business, is when control of the business should be passed to the next generation, without risking the valuable assets of the business if something goes wrong.

There are multiple options that:

  1. enable security for the next generation to be able to continue to conduct a family business to support their own family;
  2. provide off-farm/non-business siblings with an inheritance in due course that can be considered to be fair, even if it is not equal; and
  3. protect large assets in the event, at least for a period of time, that the next generation runs into any form of financial difficulty, whether that be from creditors, death, total and permanent disability or divorce.

Unfortunately, it is far too common to see the first generation wishing to retain control of large assets due to a perceived risk of what may happen to those assets if passed to the next generation.

With appropriate advice and planning, this risk can be minimised, and ultimately the first generation needs to be aware of the potential risk to the family and the business as a consequence of not appropriately transitioning an intergenerational business during lifetime.

Conversely, it is very important to ensure that the next generation is in fact invested in the business, fully trained on all aspects of the business (particularly the financial aspects of the business) before a full transition of the business occurs.

With appropriate structuring and advice, the next generation can have a level of involvement in the business that involves a transition of management first before any transition of valuable assets occur.

It is however important in these circumstances to ensure that in the process of any transition of management control, parents are still involved in the conduct of the business to some extent, both for the purposes of CGT and duty in some States.

Frequently we see situations where the business itself has been fully transitioned to the next generation, with the parents retaining only ownership of the land without any other involvement in the business conducted on the land, and this can become extremely costly when it is necessary to transfer the land in due course. An example of this is below:

Case Study

Margaret inherited a cattle station on the death of her husband. She did not want to remain involved in the business after the death of her husband, but wanted to retain some security for having access to capital assets in the event that she had any health issues later in life.
Her accountant advised her to transition some of the land to her son and daughter in law, who were fully conducting the business on the land in their own discretionary trust entity. Three quarters of the land was transferred to the son and daughter in law, with one quarter retained by Margaret.
For the next 20 years, the next generation conducted business on the land in their discretionary trust. Margaret was not involved in the business and did not receive any distributions from the relevant trust entity. She had an alternative source of income. Over that period of time, the value of the land rose from an original cost base of $4 million to a market value of $15 million.
One of Margaret's other children, who was suffering severe financial difficulties, made reference at a family Christmas that he expected to receive a share of the property on Margaret's death.
Margaret therefore sought advice in respect of transferring her quarter share of the property completely to her son and his wife. Unfortunately, as the relevant CGT asset was not used by her or by an entity connected with her in a business for at least 7.5 years, the land did not satisfy the active asset test in respect of Margaret to enable her to access the small business CGT concessions. Other than the general CGT discount, the gain would otherwise be fully taxable at Margaret's marginal rate.

In this situation, for the purposes of duty in Queensland, the transfer of control of the business well before the transfer of land is also problematic as it is arguable the business is no longer carried on by Margaret, whether alone or with others, as required under the terms of Part 10 of the Duties Act 2001.

There is no easy answer in respect of maintaining control as to some extent the timing of passing control will depend upon the many factors including the business acumen of the next generation.

Having said that, if parents are no longer involved in the business and the capital required to fully fund the parents in retirement is able to be secured for parents, then passing full control of the business needs to be properly considered, along with passing of the assets that are needed to conduct the business, so that the next generation is secure with a viable business moving forward for themselves and their family.

Ultimately the capital required in retirement should be of a sufficient amount that it generates the income needed in retirement, without debt, and without the capital being reduced for the remainder of the parents' lives, so that off-farm siblings are able to take an inheritance in due course.

If this is not able to be achieved, a carefully structured agreement between family members may need to be considered to limit the exposure of the business to any potential family dispute in respect of business assets.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.