Succession planning is an essential process for business owners, particularly those in family-owned businesses, as they look to transfer ownership or exit their companies. With many business owners approaching retirement age and the “great wealth transfer” expected to see $3.5 trillion passed down from Baby Boomers to their heirs by 2050, the need for professional advice on succession, family trust issues, and Division 7A loans is becoming increasingly critical. Tax expert Peter Bardos from HLB Mann Judd has highlighted that as these issues arise more frequently, businesses will need guidance in navigating the complex tax laws and regulations surrounding ownership transfer.
A significant challenge faced by many family-owned businesses involves family trusts. Discretionary trusts, commonly used for business ownership, are governed by strict tax rules that require an election to qualify as a family trust. Without this election, transferring shares or assets within the family can lead to the application of the family trust distribution tax, which can reach 47%. This creates a need for businesses to ensure that their family trust arrangements are properly structured and that tax implications are thoroughly understood before initiating a transfer of assets or ownership.
Another issue businesses face during succession planning involves Division 7A loans. When the ownership structure of a company changes, historical loans between the business and its shareholders may no longer be valid. This can require restructuring of these loans or payments of dividends over time, and failing to address these issues can lead to unexpected tax liabilities. Division 7A issues are also under the ATO’s radar, as evidenced by recent webinars focused on this area.
How an Accounting Firm Can Help
An accounting firm can offer invaluable assistance in navigating these complex issues. First, they can help clients understand the intricacies of family trust elections and ensure that all required steps are taken to avoid the family trust distribution tax. Accountants can review existing trust structures and make recommendations to streamline the transfer of ownership to the next generation or to key employees, minimizing tax consequences.
Additionally, accountants can play a vital role in managing Division 7A loans. They can assess the current loan structure, advise on any necessary adjustments, and ensure compliance with tax laws when ownership changes. They may also assist in restructuring shareholder loans or arranging dividend payments over time to mitigate any tax liabilities associated with these loans.
By offering strategic advice on both family trust and Division 7A matters, accounting firms can ensure that succession planning is carried out efficiently and in compliance with tax regulations, ultimately helping clients to achieve a smooth and tax-advantaged transition of ownership.
If you should need any assistance with succession planning, please reach out to Accavallo & Company LLC for guidance and support.
