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Tax planning is a critical part of the tax management processes for all family groups, and brings about benefits such as:
So, what are the key considerations for family groups as we approach EOFY?
The first step is for family leaders to determine their tax strategy, which supports the family’s overall business and investment plans. Some families prefer the simplicity and certainty of paying taxes each year and working with post-tax dollars in hand. Others prefer a strategy deferring taxes – for example to allow further investments pre-tax, or until an upcoming liquidity event.
The use of structures plays a significant role in this. For example, when one part of the family group is supporting another, it is often preferable to do this with pre-tax investment. In this context, the tax strategy plays an important part in setting up the structures that form the family group.
There is no single correct strategy, but it is important for families and their tax advisors to be working toward the same goals. This includes plenty of discussion and communication to ensure everyone is on the same page.
Family trusts are one of the most common structures used in family groups. When undertaking annual tax planning it is critical the trustees of the trust complete a distribution resolution prior to year end. Without this resolution, the trust could end up paying penalty rates of tax on the income earned during the year.
In preparing the distribution resolution, care must be taken to review the trust deed:
The ATO is also increasingly focusing on Family Trust Elections and Interposed Entity Elections in family groups of all sizes. Similar to the annual distribution resolution, incorrect management of FTEs and IEEs can result in the family trust paying penalty rates of tax on its income. Family groups should carefully consider the impact of FTEs and IEEs on their proposed distribution arrangements each year.
Division 7A is another complex area of tax that is a key focus for the ATO. Division 7A loans generally need to be either repaid in full or be subject to a complying loan agreement that requires minimum rates of interest and principal repayment over seven years.
There are strict timing requirements for documenting Division 7A loan agreements and making the subsequent repayments. Commonly the repayments are made via either cash repayment, or the declaration of a dividend by the family company. Declaring a dividend will have wider tax implications for the family. This has intensified in recent years by significant increases to Division 7A interest rate.
Undertaking a robust tax planning process enables families to take advantage of opportunities such as:
The tax planning process also presents families with an opportunity to mitigate any tax risks. The regulatory environment surrounding tax in family groups has shifted significantly in recent years, with the ATO running three programs dedicated to reviewing the tax affairs of private Australian groups – the Top 500, Next 5,000, and Medium and Emerging Private Group programs.
Any family group that controls wealth in excess of $5m or a business with annual turnover above $10m will fall into one of these programs. The areas of focus are broad, but include tax lodgement compliance, succession planning arrangements, family trust distributions including to children and other relatives, Division 7A, CGT, property transactions, and offshore assets.
Even for simple family groups with no or few compliance matters to address, these reviews can be demanding, time-consuming, and expensive – so it’s important to ensure emerging risk areas are addressed.
It’s always recommended to go through the tax planning process in collaboration with a tax professional. If you would like to know more detail on tax planning for your business or have any related questions, please reach out today.
The announced 30 per cent minimum tax on discretionary trusts creates significant challenges for private groups.
Succession is no longer just about who takes over. Many family businesses are using succession planning as a catalyst to reassess whether their current structure is still fit for purpose. As businesses scale, trust or partnership structures can become restrictive. Issues may include limited asset protection, challenges winning commercial contracts, reduced buyer appeal, and constraints on reinvesting profits to support growth.
In estate planning, the focus is often on technical elements like drafting a will, appointing executors, minimising tax, and ensuring assets pass as intended. While these steps are important, they only form part of the picture.
