To avoid tax issues in succession: Start with your structures

Last year, the ATO’s private wealth division named succession planning, along with its tax risks, as their number one focus. It’s a story set to continue, with the ATO’s Deputy Commissioner of Private Wealth, Louise Clarke, confirming in November that this area remains high on the ATO’s 2026 agenda.

It comes as no surprise that succession planning is under scrutiny. The largest transfer of wealth in Australian history is underway and, over the next two decades, countless businesses will be handed to the next generation.

With that transfer accelerating, the stakes are higher and the margin for error is narrower than ever. Add the fact that many businesses now operate through increasingly complex financial and legal structures, and it is easy to see how something as theoretically straightforward as passing on a family business can turn into a practical and financial minefield.

Complex structures often sit at the centre of botched wealth transfers. That is, transfers that carry a far larger tax bill than accounted for. But complexity itself is rarely the problem.

Most structures are created for good reasons. Over the life of a business, entities are added to manage risk, optimise tax, support growth, or respond to regulatory change. When they are set up well, they do exactly what they are meant to do.

The difficulty arises when succession enters the picture.

At that point, an intricate structure designed to serve one set of goals is suddenly expected to support another, very different set of goals.

It is a tall order, and not one worth leaving to chance.

There is no universal rule for what makes a ‘good’ or ‘bad’ structure for the purpose of succession. Every family, business and transition is different. But when structures are misaligned with succession intentions, the pressure tends to show up in the same places.

One of the clearest examples is access to small business CGT concessions.

When people think about capital gains tax concessions, they often picture a sale to an external buyer. The aim is to reduce tax on exit and maximise the after-tax proceeds. However, those same concessions can play a very different role when the intention is to pass a business to the next generation.

In a family succession scenario, the real benefit is not just reducing tax today. It’s also resetting the tax position for the future.

Where the right conditions are met, CGT concessions can allow assets to transfer to children or other family members at market value. The next generation effectively starts with a new cost base. If they later sell the business or its assets, they are taxed only on the growth from that point onward, rather than on decades of accumulated value.

Handled well, this can materially change the long-term tax outcome for the family. This is where structure starts to matter.

Whether that cost base uplift is available depends on how the business and its assets are held, which entity is actually carrying on the business, and who is recognised as owning and controlling it for tax purposes. These are not settings that can be adjusted at the last minute. In many cases, they are determined by structural decisions made years earlier.

This is where families often come unstuck. There is a common assumption that if a business is staying within the family, the tax outcome will take care of itself. But if the structure does not support the transfer, the concessions that make succession workable on paper may simply not be available in practice.

A similar pattern appears elsewhere in family business structures, particularly where capital and control have drifted apart over time.

Division 7A is an integrity rule designed to prevent company profits being accessed without tax being paid at the individual level. It treats certain loans or unpaid amounts from a company to related parties as dividends unless they are properly managed.

In many family groups, this shows up as loans or unpaid balances between companies and trusts. Profits may be allocated to a company, while the cash remains in the business to fund operations or investment. While control remains with one generation, these arrangements are usually understood and managed. The tension emerges when succession begins.

Those balances do not disappear when ownership or economic benefit starts to shift. They remain embedded in the structure. What was previously manageable can begin to restrict options, forcing repayments, triggering dividends, and producing tax outcomes that were never part of the intended transition.

In some cases, accumulated Division 7A balances also affect how an entity is assessed for tax purposes. Where a significant portion of value sits in loans rather than in the operating business itself, access to small business CGT concessions elsewhere in the structure can be limited, often at the point those concessions are most needed.

Most succession planning starts with outcomes. Who will run the business. Who will own what. How income will flow during the transition. The structure is often treated as something that can be adjusted later to support those decisions. That assumption is where issues take root.

Once succession moves from intention to execution, the structure determines what can actually happen. What can be transferred, when it can be transferred, and on what tax terms. Connections that were immaterial day to day become decisive. Assets assumed to be separate turn out to be financially linked. Value expected to move cleanly between generations becomes tied up elsewhere in the structure.

The structure has not failed. It has done exactly what it was designed to do, just not for the task it is now being asked to perform.

This is why succession planning cannot be approached in fragments. Tax, accounting, wealth planning, and estate considerations influence one another, and decisions made in isolation tend to narrow options elsewhere.

Effective succession planning requires these elements to be considered together, with a clear understanding of how today’s structural decisions will shape what is actually possible when the time comes to pass the business on.

For families starting to think about succession, an early conversation can help clarify whether your current structure is fit for what comes next. To discuss your situation, get in touch with our tax advisory team.

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