Tax considerations for succession planning in private groups

By Tim Hall, Tsae Liew and Nathan Greene

26 September 2025

Succession planning often presents a significant challenge for privately owned groups, especially where family trusts and complex ownership structures are involved. The Australian Taxation Office (ATO) recognises these complexities, thus, succession planning has become a key compliance focus area for the regulator.

Getting succession right — both from a family dynamic and tax compliance standpoint — is necessary to preserve the legacy and wealth being passed on to future generations. Therefore, a thorough understanding of the income tax implications, particularly in relation to family trust elections and treatment of pre-CGT assets, is essential to ensure efficient wealth transfer and to minimise unexpected tax outcomes.

Family trust elections and succession planning

What is an FTE?

A family trust election (FTE) designates a trust — typically a discretionary (non-fixed) trust — as a ‘family trust’ for income tax purposes, with a ‘specified individual’ named as the person from whom the ‘family group’ is determined.

An FTE provides several tax benefits, including:

• increased ease of satisfying the 45-day holding rule for franking credits
• concessional treatments when applying the company and trust loss provisions; and
• potential eligibility for the small business restructure rollover.

A valid FTE can only be made where the relevant tests are satisfied, and the election is in writing in the approved form.

Once made, an FTE is only revocable in limited circumstances.

Relevance of FTEs in succession planning

The identity of the specified individual (or ‘test individual’) and the composition of their ‘family group’ are critical.

The ‘family group’ is defined in the income tax law and includes certain family members and associated entities. This determines the potential beneficiaries to which the family trust can distribute income and capital without triggering family trust distribution tax (FTDT) — a significant tax levied upon the trustee at 47% (being the current top marginal tax rate, plus Medicare levy) on the amount of the distribution outside the ‘family group’.

Distributions outside of the family group can also include the advancement of loans by a trust.

Key considerations for succession planning:

• Generally speaking, a trust can only make an FTE once. It is therefore critical that proper thought and planning is undertaken as to who the specified individual should be and the specified year the election is made.
• The death of the specified individual does not revoke or alter the FTE. However, an individual cannot be elected as a specified individual after their death which may impact future trusts forming part of the ‘family group’ of the deceased.
• It is important to periodically revisit (at least annually) who currently still forms part of the specified individual’s ‘family group’ before the trustee distributes income or capital of the trust. For example, consider the impact of marriage breakdowns, change in family composition and ownership structures, which generally evolve with each generation, to avoid inadvertently triggering FTDT.
• Consider if trusts within a family group can distribute to one another. Broadly speaking, this requires both family trusts to have the same specified individual, or alternatively, an interposed entity election (IEE) in place, to ensure distributions are not subject to FTDT.
• Where a company is not wholly owned by a member of the ‘family group’, an IEE may be required to allow distributions to that company without FTDT arising. Careful planning is needed to make sure the IEE requirements are met—this is especially important as families grow and set up their own structures, but still want to co-invest.
• Consider the challenges that may arise in selling a family business operating through companies and unit trusts which have an IEE in place. This may necessitate restructuring the business prior to the transaction.

When the disposal of pre-CGT assets are not tax-free

The capital gains tax (CGT) regime was introduced on 20 September 1985.

Prima facie, the disposal of assets acquired prior to 20 September 1985 (pre-CGT) should be tax-free. However, there are two circumstances to be aware of that may arise as part of planning for family and business succession where the disposal of pre-CGT assets may be subject to tax:

1. Disposal of pre-CGT interests held in an entity (e.g. shares in a company or units in a unit trust), where there is a change in underlying value of the entity’s assets such that the market value of the post-CGT assets (i.e. those acquired on and after 20 September 1985) held by the entity is at least 75% of the entity’s net asset value immediately prior to disposal; or
2. Disposal of a pre-CGT asset, where there is a change in the majority underlying interests in a company or trust which holds pre-CGT assets.

Substantial change in underlying assets held by a company or trust: CGT event K6

While a gain realised on the disposal of a pre-CGT interest in a company or trust is generally disregarded, CGT event K6 contained in the Income Tax Assessment Act 1997 can convert what would have been a disregarded capital gain into an assessable capital gain.

Broadly, this occurs when the market value of post-CGT property of a company or trust that is disposed of is at least 75% of the entity’s net asset value immediately prior to its disposal.

Where CGT event K6 arises, a portion of the capital proceeds received for the disposal of your interest in the company or trust that is ‘reasonably attributable’ to post-CGT assets is subject to tax.

Majority change in beneficial ownership: Division 149

When dealing with interests in trusts or companies which hold pre-CGT assets, consideration should be given to the application of Division 149 of the Income Tax Assessment Act 1997.

Division 149 applies where there is a change in beneficial ownership of at least 50% in a company or trust, which may result in a CGT asset held by the company or trust ceasing to be a pre-CGT asset.

The CGT asset’s tax cost base is reset to its market value on the date it stops being a pre-CGT asset.

Key considerations for succession planning:

• Before restructuring any pre-CGT interests in companies or trusts, carefully consider the applicability of CGT event K6 — particularly where the underlying asset mix has shifted towards post-CGT assets.
• Consider the implications of triggering Division 149 prior to any restructure and the future income tax consequences on pre-CGT assets. 
• Where the loss of pre-CGT status for assets held by a company or trust is expected to occur as part of the succession plan, private groups may take the opportunity to restructure their interest to a more appropriate structure that suits the next generation’s objectives now that the pre-CGT status of assets no longer needs to be protected.

Key takeaways

• FTEs are not ‘set and forget’ — trustees must review them regularly (at least annually) as family groups and ownership structures evolve over time.
• Distributions, including loans, outside the family group where a valid FTE and IEE is in place can give rise to FTDT.
•  The disposal of pre-CGT interests in a company or trust may be taxable, where post-CGT assets exceed 75% of the net value of the company or trust. Careful management of asset valuations and portfolio mix is required.
• CGT assets acquired by companies and trusts prior to 20 September 1985 may lose their pre-CGT status where there are changes in the majority underlying interests in the entity. This can increase future CGT exposure on the disposal of those assets.
• Early tax advice and thorough planning can minimise unexpected tax consequences and preserve family wealth during generational transitions.

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