Every business and every owner’s circumstances are different. Before acting, it is essential to obtain professional legal and tax accounting advice. The concessions, structures, and rules are complex and highly dependent on your eligibility and timing. Here are some of the legal considerations in Australia for employee succession.
Why Legal and Tax Planning Matters
Even the best-designed succession can fail if it ignores the legal and tax framework. Structures that seem sound on paper may collapse under unexpected tax liabilities, or disputes may arise if ownership and governance are not properly documented.
In Australia, tax and legal considerations influence:
- How much of the sale proceeds a founder retains after tax
- Whether employees or managers can afford to buy in
- The structure and sustainability of financing arrangements
Capital Gains Tax (CGT) Concessions
Australia’s small business CGT concessions are among the most powerful tools for succession planning. They can substantially reduce or eliminate tax on the sale of a business, provided strict eligibility rules are met.
Basic Conditions
To qualify, the entity must:
- Be a small business entity (aggregated turnover under $2 million) or pass the maximum net asset value test(assets not more than $6 million),
- The asset must be an active asset (used in the business), and
- Additional ownership tests apply for shares or trust interests.
The Four Concessions
- 15-Year Exemption
- If the business has been owned for at least 15 years and the founder is 55 or older and retiring (or permanently incapacitated), the capital gain can be fully disregarded.
- 50% Active Asset Reduction
- Allows 50% of the gain on active assets to be disregarded.
- Retirement Exemption
- Up to $500,000 of capital gains can be disregarded over a lifetime. If the owner is under 55, proceeds must be contributed to superannuation.
- Small Business Rollover
- Defers the gain if a replacement active asset is acquired within the allowed period. If conditions are not met, the deferred gain arises later under CGT events J2, J5, or J6.
Employee Share Schemes (ESS) and 2022 Reforms
Employee share schemes (ESS) are increasingly used in employee-led buyouts and hybrid models.
Key points:
- Reforms introduced in October 2022 created a new ESS regime under Division 1A of Part 7.12 of the Corporations Act.
- These reforms lifted issue limits before disclosure obligations apply, making it easier for SMEs to offer equity.
- ASIC released a legislative instrument in December 2022 to resolve practical issues with the new framework.
- ESS can provide tax deferral, particularly under start-up concessions, but must be carefully designed to avoid employees facing upfront tax.
Common Structures for Internal Succession
Australian successions often use combinations of:
- Private companies (Pty Ltd): Most common structure; shares can be sold to managers, employees, or trusts.
- Discretionary or unit trusts: Useful for holding ownership for multiple employees.
- Employee share trusts: Manage ESS and profit allocations.
- Hybrid structures: Combining companies, trusts, and ESS for flexibility.
Documentation Essentials
Well-documented agreements reduce risk. Founders should expect:
- Sale and Purchase Agreement (SPA): Sets out terms of sale.
- Shareholders’ Agreement: Defines rights, responsibilities, and dispute resolution.
- Trust Deed: If using a trust, outlines how employee benefits are managed.
- Governance Framework: Establishes board composition, decision-making, and reporting.
- Employment/Consultancy Agreements: For founders who remain involved post-sale.
What’s Missing: The EOT Gap in Australia
Unlike the UK, Australia does not have a legislated framework for Employee Ownership Trusts (EOTs). This creates three issues:
- Complexity: Current trust structures must be adapted, increasing cost and risk.
- No Incentives: The UK offers 0% CGT on qualifying EOT sales. Australia does not.
- Uncertainty: Without legislation, many founders hesitate to adopt trust-based succession.
By comparison:
- UK: Introduced EOT regime in 2014. More than 1,500 businesses are now employee-owned.
- Canada: The Canadian Employee Ownership Trust (CEOT) rules took effect for sales after 31 December 2023, building momentum internationally.
Industry groups like Employee Ownership Australia and the Business Council of Co-operatives and Mutuals (BCCM) continue to advocate for an Australian framework.
Key Takeaways
- Tax concessions, especially the small business CGT concessions, can significantly reduce tax for founders — but strict eligibility rules apply.
- ESS reforms in 2022 expanded employee ownership opportunities, though careful structuring is required.
- Internal successions typically combine companies, trusts, and ESS to balance flexibility and compliance.
- Documentation such as SPAs, shareholder agreements, and trust deeds is essential.
- Australia lags behind the UK and Canada in supporting EOTs with legislation and incentives.
- Founders and managers should always seek professional legal and tax advice before proceeding.
Next Chapter: Preparing Your Team to Become Owners