Demand for succession planning advice tipped to soar

Advisers must prepare for succession to come up “time and time again” this year as a growing number of ageing entrepreneurs navigate complex rules to transfer ownership to family members or employees, one HLB Mann Judd expert has predicted.

Tax partner Peter Bardos said demand for succession advice was only set to increase in 2025 as clients seeking exits often ran into issues such as family trust elections, restructuring and Division 7A loans.

“Succession just keeps coming up time and time again,” Bardos told Accountants Daily.

“We’re dealing with successions where people have built up businesses and they're looking for an external exit or where they’re looking to transfer to the next generation, whether that be within the family or employees.”

Bardos said family-owned businesses were commonly operated through or owned by discretionary trusts but “inflexible” tax laws posed challenges when it came to transferring wealth.

Specifically, he said a valid election had to be made for a discretionary trust to operate as a family trust, restricting distributions to a specific family group.

If distributions were made to a trust controlled by another family member in the next generation, the transaction could result in a 47 per cent family trust distribution tax applying.

“Discretionary trusts are really common vehicles for family-owned businesses, and to pass through sort of dividends, you need to make an election to turn them into a family trust,” he said.

“Say you've got a family trust, controlled by the older generation – mum and dad – and they own a company, and want to transfer those shares across to the kids who might have another family trust.”

“If they transfer the shares for nominal consideration that could cause some family trust distribution tax.”

Bardos said the issue was being driven by an ageing cohort of business owners, pointing to recent ATO data of the Next 5,000 largest privately owned groups.

The data found the groups were owned by taxpayers with an average age of 65.

The Productivity Commission also predicts Baby Boomers will pass on a record $3.5 trillion to their children by 2050 in what has become known as the “great wealth transfer”.

“So you can see that all of that wealth is going to be transitioned, either before death or on death over the next sort of 10 to 20 years,” Bardos said.

“That’s been the big trend that I've seen – that next generation coming through.”

“It’s something we're seeing come up as the next generation is setting up their own structures, something that we're very conscious of.”

Another issue raised by succession planning was Division 7A, as a change in ownership would mean any historical shareholder loans “wouldn’t make sense anymore”.

“The common way to deal with a Division 7A loan is to pay dividends over a number of years,” he said. “If you've changed the ownership structure, that doesn't make sense anymore.”

“You can deal with the shareholder loan if it's still owned by the same individual, but if we're passing through to a new generation, historical issues need to be dealt with now.”

Family trust elections and Division 7A loans were also “certainly on the ATO’s radar”, Bardos said, reflected by its choice of recent webinar topics.

“The ATO had a Division 7A roadshow over the last 12 months, and the next 12 months, I understand they're running one on family trusts and family trust distribution tax.”