Tax planning considerations for family groups

As the end of the financial year approaches, now is the time for family groups to consider their annual tax planning.

Tax planning is a critical part of the tax management processes for all family groups, and brings about benefits such as:

• Maximising tax efficiency
• Mitigating risks and ensuring overall tax compliance
• Proactive cash flow and tax funding management
• Utilising tax incentives
• Capitalising on opportunities to grow personal wealth

So, what are the key considerations for family groups as we approach EOFY?

Picking the right tax strategy for your business 

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.

Considering structures such as a family trust

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:

• Is the deed up to date and does it afford the trustee all the powers we would expect to see in a modern trust deed, such as streaming different classes of income?
• Who are the eligible beneficiaries of the trust?
• How is income defined?
• How and when does income need to be distributed?

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.

What about Division 7A?

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.

Take advantage of opportunities

Undertaking a robust tax planning process enables families to take advantage of opportunities such as:

• Identifying all expenses that can be claimed, prepaying expenses, or where relevant bringing expenses forward to claim in the current year to maximise tax deductions.
• Maximising deductible superannuation contributions. For FY25, the concessional contribution limit is $30,000. These contributions are taxed at 15 per cent in the fund, whereas the benefit of the tax deduction could be as high at 47 per cent.
• Reviewing capital gains and losses. For example, where there are large capital gains in the year it could be worth realising some capital losses to reduce the overall tax payable, particularly where the cash tied up in the loss making investment can be better deployed elsewhere.
• Giving back to the community through a Private Ancillary Fund, which can be an incredibly tax effective way of giving back.

Manage risk areas

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.

We’re here to help

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.

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