Avoiding Tax Traps in Succession Planning

Australia’s tax system is often praised for not having death duties, but that doesn’t mean intergenerational wealth transfer is tax-free. In fact, the Australian Taxation Office (ATO) has signaled that succession planning is a key focus area, meaning many taxpayers may be making costly mistakes when transferring assets.

Failing to plan properly can result in unnecessary capital gains tax (CGT), Division 7A complications, superannuation tax liabilities, and other financial pitfalls. If you want to pass on your wealth efficiently and minimize tax exposure, understanding the risks and structuring your estate wisely is essential.

Capital Gains Tax (CGT) and Asset Transfers

One of the biggest misconceptions in estate planning is that passing assets to the next generation is always tax-free. While assets inherited from a deceased estate are generally CGT-free for the beneficiary, the story changes if assets are transferred before death.

CGT Event A1 – Selling or Gifting Assets:

• Transferring property, shares, or other investments to family members before death triggers a CGT event.
• The transferor is deemed to have sold the asset at market value, even if no money changes hands.
• This can lead to a significant CGT liability, especially if the asset has appreciated over time.

Main Residence Exemption:

• If a principal residence is passed to a beneficiary and sold within two years, it may be exempt from CGT.
• If held beyond two years, CGT may apply based on the property’s value at the date of death.

Assets Held in Trusts:

• Transferring business assets or investment properties into a trust before death can help manage tax exposure.
• However, trusts come with their own tax and compliance obligations, making professional guidance essential.

Superannuation Death Benefits: Who Pays the Tax?

Superannuation is not automatically part of an estate. The way it’s distributed can result in different tax consequences:

Tax-Free Beneficiaries:

• If the superannuation benefit is paid to a spouse, minor child, or financial dependent, it is generally tax-free.

Taxable Beneficiaries:

• If paid to an adult child or a non-dependent, up to 17% tax may apply to the taxable component.
• If the super fund contains an untaxed element (common in government or defined benefit schemes), the tax rate can be as high as 32%.

Minimizing Super Tax:

• A recontribution strategy (withdrawing and re-contributing funds as a non-concessional contribution) can reduce the taxable component of super.
• In some cases, a binding death benefit nomination (BDBN) can ensure funds go directly to tax-advantaged beneficiaries.

Division 7A and Private Companies

Business owners often transfer wealth through private companies and family trusts, but failing to structure distributions correctly can create Division 7A tax issues.

Loans to Family Members:

• If a company lends money to a shareholder or family member without a compliant loan agreement, it may be treated as an unfranked dividend, leading to a high tax bill.
• Proper loan documentation and repayment terms must be established to avoid Division 7A complications.

Discretionary Trusts & Unpaid Present Entitlements (UPEs):

• If a trust distributes income to a company but doesn’t actually pay it, the ATO may treat the unpaid amount as a deemed dividend, attracting tax consequences.

Using Testamentary Trusts for Tax Efficiency

A testamentary trust is an estate planning tool that allows assets to be managed and distributed tax-effectively after death.

Tax Advantages:

• Minor children can receive income distributions taxed at adult rates, instead of penalty child tax rates.
• Provides asset protection against creditors, divorce settlements, and family disputes.

Who Should Consider It?

• High-net-worth individuals with significant assets.
• Families concerned about protecting wealth from future legal or financial claims.

How Boa & Co. Helps You Navigate Succession Planning

At Boa & Co. Chartered Accountants, we help families and business owners develop smart succession plans that minimize tax, protect assets, and ensure wealth is transferred smoothly to the next generation.

By proactively addressing CGT, superannuation tax, Division 7A, and estate structuring, we help you avoid costly tax traps and secure your financial legacy. Contact us today at 1300 952 286, email [email protected], or visit www.boanco.com.au to start planning your future.