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Key insights into advising your SME client on a tax sensitive business succession plan

Key insights into advising your SME client on a tax sensitive business succession plan

By Laura Spencer,

Business Succession Succession 


Succession planning can be a complex process and even practitioners experienced in the area can make mistakes.

Planning for the transition of wealth requires careful advice. Advisors need to provide clients with clear advice outlining obligations, risks and the consequences of succession plans.

One area which advisors can add value for clients is in pre-planning for involuntary succession plans. Involuntary succession plans come into play where individuals are removed from the business involuntarily due to trauma, disability or passing away. Successful involuntary succession plans allow for the transition of wealth and continuation of the business in the absence of the individual without triggering negative control, insurance or tax consequences or causing disputes with family members.

Laura Spencer, associate at Sladen Legal, will be presenting on these issues in her upcoming CPD session on Business Succession and the Tax Issues that Follow, and notes the following top tips for approaching tax sensitive succession planning:

Encourage open and transparent discussions with your clients, their business partners and their families:

From the outset, open discussions regarding the succession of a business and the transfer of wealth can assist in ensuring a smooth transition after the departure of a shareholder. Matters can become tense where a family business represents a great portion of the wealth of the shareholder’s estate and/or where their involvement in the business is significant.  Open and transparent discussions will go a long way to preserving harmony and upholding the individual’s wishes.

Approaching buy-sell agreements:

A buy-sell agreement is an agreement that allows for the continuing participants in a business to “buy”, or the estate or family members of a departed participant to “sell”, the interest of the departed participant, that is triggered upon a specific event. Whilst buy-sell agreements are key to providing certainty to the participants advisers are often frustrated by the inability to simply access a standard form agreement. The lack of the standard off the shelf agreement (or the danger in using one if it exists) relates directly to the nature of each private business enterprise itself being unique.

Carefully plan so you can access CGT concessions:

Through careful planning it is possible to apply a range of tax concessions to reduce any capital gain derived by the departed participant on the disposal of the business interest under the buy-sell agreement. However, the combination of the changes made in respect of the ability to stream capital gains, and the Commissioner’s interpretation of trust law income specifically excluding any notional amount such as the deemed capital proceeds derived as a result of the application of the market value substitution rule, means that the timing of the particular disposal event needs to be carefully considered.

Consider the implications for the business structure as a whole:

Advisors should ensure that participants need to give consideration as to what implications flow from the buy-sell agreement being triggered in light of the control of the structure. Will particular equity positions be unbalanced? Should the agreement provide for equal proportionate transfers of the equity to the continuing participants or is the equity to be transferred in an alternate manner in order to preserve decision-making thresholds etc.

Want more? Register for the Essential Tax Updates for Business Advisors Intensive on March 7. Laura will be discussing a range of issues in her session on Business Succession and the Tax Issues that Follow including the small business restructure rollover relief, shareholder agreements, buy sell agreements and insurance.

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