BALDWINS • FoodLegal

Australian Lawyers and Consultants

Family Asset Reorganisations

September 2002

If families, or individuals within a family, want to part ways in their business or investment dealings, either by a dissolution of the group or a mix of payments or distributions, it is extremely important to consider the possible tax consequences for the clients. For example, some types of changes to a family trust could unnecessarily trigger a resettlement or other similar Capital Gains Tax (CGT) event in some circumstances.

In reorganising a family group structure, the potential tax and stamp duty liabilities require that great care be taken. For example, a pre-CGT asset (i.e. an asset that was acquired prior to 19 September 1985 and would therefore remain exempted from capital gains tax on its disposal) might become a post-CGT asset so that a tax liability may consequently arise. Worse still, some “CGT events” in relation to a post-CGT asset in the course of a reorganisation of assets might actually trigger an immediate CGT liability. Likewise, unwanted income tax or stamp duty liabilities might be triggered by a capital distribution or deemed dividend payment by liquidation or vesting.

Luckily, from 1 July 2002, there is no longer any stamp duty in Victoria on transfers of most unlisted shares and units (other than “property rich” entities). Furthermore, from 1 July 2002, there are additional avenues for possible CGT rollover relief for jointly-owned entities that divest themselves of certain equities (e.g. shares in companies, or units in fixed trusts).

Discretionary Trusts: Whilst discretionary trusts are not eligible for the new so-called “demerger” relief (to come into effect from 1 July 2002), it is still possible for a discretionary trust to obtain some of the other CGT concessions such as (i) the CGT 50% discount and (ii) the CGT “small business” concessions including full or partial CGT exemptions (but only if certain preceding events have occurred in relation to the income and capital of the discretionary trust so that the “controller” test is met, and also that the “small business” associated entity AUD$5m threshold test can be met). The discretionary trust also has other structural advantages in succession planning.

Although the tax issues are very complex, there are different ways to achieve the family’s objectives whilst at the same time reducing the scope for substantial liabilities that could be an unwanted consequence of the reorganisation.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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