Business Succession Planning in Victoria

Why Business Owners Need Estate Planning

A Will prepared without reference to the business structure often fails to deliver the intended result, for three connected reasons.

• You may not own what you think you own. Shares in a private company and units in a unit trust are property of the deceased and fall into the estate. The assets inside a discretionary family trust do not — the trustee holds them, and the Will cannot dispose of them. Superannuation ordinarily does not form part of the estate either; it is paid by the fund trustee in accordance with the governing rules and superannuation law, and reaches the estate only if it is directed there.
• Control and ownership are different things. The shareholder of a company may not be its director. The unit holder of a trust may not be its trustee. The member of an SMSF may not control the trustee company. A Will that deals with ownership but ignores the offices that carry legal authority can leave the wrong person, or no one, in charge.
• Contracts and governing documents operate alongside the Will, not underneath it. It is inaccurate to say a shareholder agreement or a buy/sell deed simply "overrides" a Will. The documents operate in different legal spheres. A Will passes property the deceased owned, but it passes that property subject to enforceable contractual rights, the restrictions in the company constitution, and the statutory transmission provisions that govern how the personal representative deals with the shares. So if the Will gives shares to a daughter while a shareholder agreement grants the other owners an option over them, the gift takes effect subject to that option. Trust assets ordinarily do not form part of the deceased's beneficial estate and cannot be distributed under the Will merely because the deceased was a trustee, beneficiary or controller of the trust. Superannuation is governed separately: a death benefit may be paid directly to an eligible beneficiary or to the deceased's legal personal representative for distribution through the estate, depending on the governing rules, any effective death benefit direction and the trustee's powers.

Succession planning is the work of reconciling those spheres in advance, so that the Will, the governing documents and the commercial agreements tell a consistent story. For the practical consequences when that work has not been done, see our companion guide on what happens to a business when the owner dies in Victoria.

Sole Traders

A sole trader carries on business in their own name. There is no separate legal entity, so on death the business assets, liabilities and contractual interests ordinarily fall into the estate and become the responsibility of the executor or administrator. That is not the same as the business stopping. Whether trading can continue, and on what footing, depends on the authority the personal representative has under the Will and the general law, the terms of the relevant contracts, any licences or registrations, the insurance position and the practical circumstances of the business.

The questions that need immediate attention are usually these.

• Authority to trade. A Will may expressly authorise the executor to carry on the business for a period, to sell it as a going concern or to wind it up. Where the Will is silent, or where there is an intestacy, the position is narrower and legal advice should be obtained before trading continues.
• Personal exposure and indemnity. A personal representative who continues trading may incur obligations personally, with a right of indemnity out of the estate that depends on acting properly and within authority. That is a real risk and should be understood before, not after, the first order is placed.
• Insurance. Public liability, professional indemnity, workers' compensation and asset cover need to be checked and, where necessary, put on a proper footing for the changed circumstances.
• Employees, payroll and tax. The effect of death on employment arrangements depends on the contracts, the applicable instrument and the circumstances, and should not be assumed either way. Payroll, superannuation guarantee, PAYG withholding, BAS and other registrations all need attention quickly, with input from the accountant.
• Contracts and customers. Some contracts are personal to the proprietor and some are not; many contain termination or change-of-control provisions. They need to be read.

Where a sole trader business carries material goodwill, a client list, contracts in progress or staff, the sensible planning options are to consider a more resilient structure, to bring in a co-owner with a documented arrangement, or at a minimum to record in the Will the authority and the intended steps for the personal representative.

Partnerships

Partnerships are governed in Victoria by the Partnership Act 1958 (Vic), read together with whatever the partners have agreed. The default position under that Act is that, subject to any agreement between the partners, a partnership is dissolved by the death of a partner. That default is frequently displaced, and for a trading business it usually should be.

• Dissolution or contractual continuation. A partnership agreement can provide that the partnership continues between the surviving partners, with the deceased partner's interest dealt with under the agreement. Without that, the firm may fall to be wound up, its assets realised and the accounts taken — an outcome that can destroy going-concern value.
• Partnership property versus the partner's interest. Partnership property is held for the purposes of the partnership. What a deceased partner passes to their estate is ordinarily an economic interest — a right to have the partnership affairs settled and to receive the value attributable to their share — rather than a right to particular firm assets.
• Authority of the survivors. After a death the authority of the continuing partners is constrained. Absent a continuation agreement, it is generally limited to what is necessary to complete unfinished business and wind up. Acting outside that can create disputes with the estate.
• Valuation and payment. The agreement should specify the valuation date and method, whether goodwill is included, how debt, work in progress and drawings are adjusted, and whether the estate is paid as a lump sum, by instalments or against insurance proceeds. Silence here is the usual source of litigation.
• Insurance and buy/sell provisions. Partnerships use the same funding architecture as companies: trigger-based buy/sell terms supported by insurance owned in a structure chosen with legal and tax advice.

Companies

A company is a separate legal person and does not die when its shareholders or directors die. What changes is the ownership of the shares and the identity of the office holders.

Transmission of shares. On the death of a shareholder the shares form part of the estate. How the personal representative may deal with them, and whether and on what terms they may be registered as the holder or transfer the shares to a beneficiary, is governed by the Corporations Act 2001 (Cth) and the company's constitution, together with any shareholder agreement. Constitutions commonly contain directors' discretions, pre-emptive rights or restrictions on registration, so the documents have to be read rather than assumed. The voting position in the interim likewise depends on those documents; it is not universally true that the shares cannot be voted until the personal representative is registered. Share transmission mechanics are covered in detail in private company shares in deceased estates.

The sole member and sole director company. Section 201F of the Corporations Act addresses the structure that is very common among Victorian small businesses. Where the sole member of a proprietary company who is also its sole director dies, the personal representative or trustee appointed to administer the deceased's estate may appoint a person as director of the company. That mechanism is not confined to cases where probate has been granted — it accommodates administration on intestacy under letters of administration as well. What causes practical delay is different: ASIC, banks, landlords and counterparties will usually want evidence that the person purporting to act is in fact the administrator of the estate, and obtaining a grant takes time.

It is therefore an overstatement to say that nothing can happen in the meantime. Existing bank mandates, authorisations, agency arrangements, a company secretary or delegated signing authorities may allow some ordinary operations to continue, depending on their terms and on how the relevant institution responds. The point of planning is to know in advance which of those exist and what they permit. Directors' and shareholders' death is treated at length in what happens to a company when a director or shareholder dies.

A second director is a decision, not a formality. Appointing an additional director while the principal is alive can remove a single point of failure. But a proposed director must consent to act and then holds a real office: the statutory duties of care and diligence, good faith, proper purpose and the insolvent trading provisions apply to them, with personal exposure attached. It is not a nominal, cost-free step, and it should be considered alongside alternatives such as a carefully drafted Will and constitution, documented authorities and clear instructions to advisers.

Incapacity is a separate problem. An attorney under an enduring power of attorney does not step into the office of director; directorship is personal and cannot be delegated to an attorney in that way. What a properly authorised attorney may be able to do is exercise the principal's powers as a shareholder, which may in turn allow the appointment of another director — but only where the power of attorney, the constitution, any shareholder agreement and the general law permit it. That chain needs to be checked before it is relied on.

Family Trusts

Discretionary family trusts are a very common structure for Australian small and medium enterprises, and among the most commonly mishandled in estate planning. The starting point is to distinguish carefully between several different things that are often run together.

• The trust's assets. They are held by the trustee on the terms of the deed. They are not the deceased's property and the Will does not dispose of them.
• Beneficial interests. In a discretionary trust a beneficiary ordinarily has a right to due administration and to be considered, not a proprietary interest in particular assets. In a unit trust the units themselves are property that can pass under a Will.
• Appointor, principal or guardian powers. These roles are often described as controlling the trust, but that is a generalisation. Whether the power extends to removing and replacing the trustee, whether consent is required for particular decisions, whether the role can be exercised jointly, whether it can be appointed by Will, and who succeeds to it on death or incapacity, are all determined by the deed and the surrounding circumstances. Some deeds are express, some are silent, and some produce a result the founder did not intend. This is dealt with in detail in what happens to a family trust when the appointor dies.
• Shares in the corporate trustee. Those shares are property and can pass under a Will. Who holds them is a different question from who is a director of the trustee, and a different question again from who holds the appointor power.
• Directorship of the corporate trustee. This is the office through which trustee decisions are actually made, and it is subject to the company issues described above.

A succession review for a family trust therefore starts with a careful reading of the deed and any amendments: who holds each role, how each is succeeded, what constraints apply, who is within the beneficiary class, what the vesting date is, and whether the amendment power is wide enough for any change contemplated. Whether a deed needs amendment is a question for the particular deed and the family's circumstances, and amendments carry their own tax and duty consequences discussed below.

Self-Managed Superannuation Funds (SMSFs)

SMSFs sit at the intersection of business, retirement and estate planning, and are governed by the fund's own deed together with the Superannuation Industry (Supervision) Act 1993 (Cth) and its regulations.

• Trustee continuity. A legal personal representative does not automatically become a trustee. What section 17A(3)(a) of the SIS Act does is preserve the fund's status as a self-managed superannuation fund where the legal personal representative of a deceased member is a trustee, or a director of the corporate trustee, in place of the member during the period beginning on the member's death and ending when death benefits commence to be payable. Taking up that position still requires a valid appointment under the trust deed, and, for a corporate trustee, valid company steps — consent, appointment and ASIC notification. Doing this promptly and correctly matters for compliance.
• Death benefit directions. Whether a binding death benefit nomination binds the trustee depends on the deed and the applicable law: whether the deed authorises binding nominations, whether the form and execution requirements have been met, whether the nominated recipients are permitted recipients under superannuation law — broadly, dependants as defined and the legal personal representative — and whether the nomination has lapsed. Some deeds allow properly drafted non-lapsing nominations; others impose a renewal period. A reversionary pension operates differently again, by continuing the pension to the reversionary beneficiary. Where there is no effective binding direction, the outcome depends on the deed, which may confer a discretion on the trustee or provide a default.
• Liquidity. Where the fund's principal asset is business real property leased to the family business, the fund may not hold cash to pay a lump sum benefit. That has to be planned for, whether by insurance held inside the fund, by a pension strategy, or by a documented plan to deal with the property. Insurance inside superannuation raises its own eligibility, cost, ownership and tax questions, and belongs with licensed financial and tax advice rather than assumption.

Shareholder Agreements

A shareholder agreement is the rulebook between the co-owners of a company. For succession purposes the key provisions are pre-emptive rights, permitted transferees, the valuation mechanism, the funding mechanism and dispute resolution.

• Pre-emptive rights. Existing shareholders are commonly given the first opportunity to acquire a deceased or departing shareholder's shares. This is the provision that most often sits awkwardly with a gift in a Will.
• Permitted transferees. Some agreements allow transfers to family members or a family trust and some do not. The estate plan should be drafted to match.
• Valuation mechanism. Independent valuation, an agreed formula or last filed accounts each produce different outcomes and different disputes. The price mechanism, more than any other clause, determines whether the family receives fair value.
• Funding. Where the agreement obliges remaining shareholders to buy, the source of the money has to be identified. See the next section.
• Dispute resolution. Staged negotiation, mediation and expert determination clauses can resolve valuation and process disputes far more cheaply than litigation.

Buy/Sell Agreements and Insurance

A buy/sell agreement is a contract between business co-owners that operates on defined triggering events. Depending on what the parties choose, those triggers may include death, permanent incapacity, a trauma or critical illness event, retirement or bankruptcy. Drafting is fact-specific: the trigger definitions, the notice mechanics and the completion terms should be tailored to the business rather than taken from a precedent unchanged. Buy/sell mechanics are covered in more depth in buy-sell agreements explained.

Buy/sell arrangements are typically structured as put options exercisable by the outgoing owner or their estate, call options exercisable by the continuing owners, or combined put and call structures.

Funding. It is not correct to say that without insurance funding a buy/sell clause is unenforceable. The obligation may remain perfectly enforceable; the problem is commercial. An unfunded obligation creates liquidity risk, the prospect of delayed completion, default under the agreement and litigation between the estate and the surviving owners at the worst possible time. Funding options include insurance, retained reserves, vendor finance and external finance, each with different risk.

Ownership of policies. Cover can be held under self-ownership by each insured owner, cross-ownership between the owners, entity ownership by the business, or through a suitably drafted insurance trust. Each has different tax, asset-protection, control and practical consequences, and none is universally right. The choice needs joint legal, accounting and licensed financial advice on the facts.

Coordination. The agreement and the policies must work together. Matters to address include how the proceeds are applied against the sale consideration and what happens to any excess or shortfall, the valuation date and method, whether goodwill is included, how business debt, loan accounts and working-capital movements are adjusted, whether a minority interest is valued on a proportionate or discounted basis, how a controlling interest is treated, and how a valuation dispute is resolved.

Key Person Insurance

Key person insurance is a different concept from buy/sell cover. It is a policy taken out in respect of an individual whose death or incapacity would cause the business material financial loss — typically a founder, principal salesperson, lead practitioner or technical specialist — with the proceeds intended to support the business rather than to buy an ownership interest.

Proceeds are commonly applied to fund recruitment and training of a replacement, to cover lost revenue through the transition, to reassure suppliers, customers and lenders, and to repay or refinance business debt.

Guarantees. On that last point a common misconception needs correcting. Applying insurance proceeds to repay business debt does not itself release a personal guarantee given by the deceased. Repaying the facility may, in practice, bring the exposure to an end, but discharge depends on the terms of the guarantee and the security documents, and the estate can remain exposed in the meantime — including for other facilities covered by an all-monies guarantee or a general security interest. The lender may also have rights to review, reprice or accelerate on the death of a principal, or to treat it as a change-of-control or review event. The finance documents should be read as part of the succession plan, not after the event.

For owner-operated businesses key person and buy/sell cover often operate together on separate policies with separate purposes, and should be reviewed together so that cover is neither duplicated nor left short.

Passing Control of Family Businesses

Family businesses introduce a layer of complexity that purely commercial succession does not: the children who work in the business, the children who do not, and the spouse in the middle.

"Equal" and "fair" are rarely the same thing in family business succession. Leaving the business equally to three adult children when only one works in it commonly produces conflict. The approaches that tend to work involve some combination of:

• passing the business or a controlling interest to the working child or children and equalising other children with non-business assets such as real estate, superannuation or insurance;
• using a testamentary trust to hold the business interest, with control allocated deliberately rather than by default;
• a phased transition over an agreed period while the founder is still alive, with formal governance and external advice; and
• documenting the plan transparently, which can reduce misunderstanding and conflict.

Governance structures for multi-generational businesses are covered separately in family business governance and succession in Australia. Planned, lifetime departures are dealt with in business exit strategy.

Succession Planning for Professional Practices

Professional practices — legal, medical, dental, accounting, allied health — carry succession issues that general commercial planning does not address, because ownership, control and continuity are regulated. The rules differ materially between professions and between entity types, and it is wrong to assume a single rule applies across them. What is required is profession-specific advice on the applicable regime.

The matters that usually need to be checked include:

• Who may own and control the entity. Requirements around authorised principals, legal practitioner directors, registration of the entity and who may hold or control interests vary by profession and by structure, and they constrain who a practice can pass to and on what conditions.
• Licensing, accreditation and provider arrangements. Practice authorisations, provider numbers, accreditation and third-party payer arrangements are often personal and may not transfer.
• Confidentiality and client or patient records. Custody, access, transfer and retention of files are subject to professional obligations and privacy law, and cannot simply be dealt with as business assets.
• Regulator notification. Death, incapacity or a change in principals commonly triggers notification obligations within defined periods.
• Insurance and run-off cover. Professional indemnity arrangements, including run-off cover for claims notified after practice ceases, protect the estate; scheme requirements differ by profession.
• Restraints, premises and consents. Restraint of trade provisions, the lease, equipment finance, software and referral arrangements often contain assignment or change-of-control clauses requiring consent.
• Continuity arrangements. Locum cover, a pre-arranged sale to a colleague or corporate buyer on agreed terms, and a communications plan for clients or patients keep value from evaporating in the first weeks.

Tax Considerations

Tax sits underneath every succession plan. This is an overview of the issues that most often arise; it is not exhaustive and each of these requires current advice on the particular facts.

• Division 128 and death. Division 128 of the Income Tax Assessment Act 1997 (Cth) contains rules that generally disregard a capital gain or loss when an asset passes on death to a legal personal representative or beneficiary, with the recipient taking the asset on a cost base determined by the Division — broadly the deceased's cost base for a post-CGT asset, and market value at the date of death for a pre-CGT asset. The Division contains important exceptions, including where an asset passes to a tax-advantaged entity or a non-resident beneficiary, and a later disposal by the recipient is generally a CGT event in the ordinary way. The application of the Division to a particular asset and recipient needs to be confirmed.
• Small business CGT concessions and section 152-80. The Division 152 concessions — the 15-year exemption, the 50% active asset reduction, the retirement exemption and the small business rollover — may reduce or eliminate a capital gain on an active asset, subject to strict eligibility requirements. Importantly for estates, section 152-80 provides a pathway under which a legal personal representative, a beneficiary, a trustee of a testamentary trust or a surviving joint tenant may access concessions the deceased could have accessed immediately before death, subject to all of the relevant requirements being met and, ordinarily, a CGT event happening within two years of death. Any extension of that period depends on the law and the Commissioner's discretion. This is a deadline that should be diarised at the outset of the administration.
• Life policies and CGT. Cross-ownership of buy/sell policies is not inherently taxable, and it is wrong to treat it that way. Section 118-300 of the ITAA 1997 disregards a capital gain or loss from a CGT event in relation to a policy of insurance on a person's life in defined circumstances, which turn on matters including whether the taxpayer is the original beneficial owner of the policy or acquired the interest for no consideration. Because the purpose of the policy, its ownership, who pays the premiums, how proceeds are applied and how the buy/sell consideration is expressed all interact, the insurance structure and the agreement should be drafted together with coordinated tax advice.
• Superannuation death benefits. Two different definitions apply and they do not align. Who may receive a benefit is governed by the concept of a dependant under superannuation law, together with the legal personal representative. How the benefit is taxed turns on whether the recipient is a death benefits dependant for tax purposes, which is a narrower and differently drawn concept. Payments to a death benefits dependant are broadly concessionally treated, while payments to others, commonly independent adult children, are taxed on the taxable component under the applicable rules; the outcome depends on the components of the benefit, its form and the recipient, and no single rate applies to every payment.
• Trust deed amendments and resettlement. The Commissioner's view in Taxation Determination TD 2012/21 is that a change made in valid exercise of an existing power of amendment will not ordinarily cause a trust to terminate for CGT purposes, and so will not of itself result in CGT event E1, merely because the terms of the trust change. Different consequences can arise where the amendment is beyond power or invalid, or where the change is such that the trust property is held on a separate charter of rights and obligations amounting to a distinct trust relationship. Victorian duty is a separate question with its own tests and should be considered before any deed is amended.
• Other items for tailored advice. Division 7A and shareholder loan accounts, retained earnings and franking credit capacity, carried-forward tax losses and the tests that govern their use, and trading stock treatment on a transfer of business all bear on succession outcomes and should be reviewed with the accountant as part of the plan.

Incapacity and Continuity Checklist

Succession planning is usually framed around death, but incapacity can be harder to manage because there is no executor and no deceased-estate grant. The following checklist covers the items that most often determine whether a business keeps operating.

• Control of each entity. Who can act as director, trustee, appointor and SMSF trustee or trustee director if the principal cannot, and what documents give them that authority.
• Enduring powers of attorney and their limits. An enduring power of attorney can be essential for personal and shareholder matters, but it does not confer the office of director and cannot be used to exercise powers the principal does not hold personally.
• Bank and payment mandates. Signatories, limits, dual-authorisation settings, card facilities, merchant terminals and payment platform administrators.
• Payroll and tax access. Access to payroll systems, employee records, the ATO online services, registered agent arrangements and the director identification and lodgement obligations.
• Personal guarantees and finance covenants. Who has guaranteed what, on which facilities, and whether the finance documents contain key-person, review, change-of-control or default provisions triggered by death or incapacity.
• PPSR and security interests. Registrations granted and held, renewal dates and anything that would fall away if unmanaged.
• Leases, licences and franchises. Premises and equipment leases, guarantees given under them, industry licences and registrations, and any franchise agreement conditions dealing with death, incapacity, transfer or approval of a new operator.
• Key contracts and change of control. Customer, supplier, distribution and software agreements with termination, assignment or change-of-control clauses.
• Insurance. Business, liability, professional indemnity, workers' compensation, key person and buy/sell cover, with the ownership and beneficiary arrangements confirmed.
• Intellectual property, domains and credentials. Registered and unregistered IP, domain name registrant and renewal details, hosting, email and system administration, with credentials held securely and access recoverable without relying on one person.
• Delegated authorities. A written schedule of who may approve what, to what limit, and what changes if the principal is unavailable.
• An emergency register. A single, current document recording where the constitution, deeds, agreements, insurance policies, finance documents and Wills are held, together with the contact details for the solicitor, accountant, financial adviser, broker, banker and bookkeeper.

Common Mistakes

The recurring problems in Victorian business succession files are largely avoidable.

• A "personal" Will that ignores the business. A Will leaving "all my estate" to a spouse, with no attention to who runs the company, who controls the trust or who holds the SMSF trustee directorship the next morning.
• Sole director, sole member companies with no contingency. Section 201F provides a route through, but only after someone has authority to administer the estate.
• A deed nobody has read. A trust deed drafted decades ago, never reviewed, with unclear succession to the appointor role and a vesting date the founder may outlive.
• Superannuation left to discretion by default. A lapsed nomination, a nomination that does not meet the deed's requirements, or a nomination in favour of someone who is not a permitted recipient.
• A shareholder or partnership agreement nobody has revisited. Pre-emptive rights, valuation mechanics and funding clauses that no longer reflect the parties' intentions or the value of the business.
• Insurance and agreement drafted in isolation. Ownership, proceeds and sale consideration that do not line up, producing tax and completion problems.
• No conversation with the next generation. Assumptions about who wants to run the business, made by the parent and never tested.
• Treating the business as a single asset. Operating company, land-holding entity, IP holder and SMSF lessor are usually different vehicles with different succession considerations.

Sources

• Corporations Act 2001 (Cth) — including section 201F (appointment of director by personal representative of a sole member and sole director) and the provisions governing transmission and registration of shares.
• Partnership Act 1958 (Vic) — including the default dissolution position on the death of a partner, subject to agreement.
• Superannuation Industry (Supervision) Act 1993 (Cth) — section 17A, including subsection (3)(a) concerning a legal personal representative acting in place of a deceased member.
• Income Tax Assessment Act 1997 (Cth) — Division 128 (effect of death), section 152-80 (small business concessions for deceased estates) and section 118-300 (life insurance policies).
• Taxation Determination TD 2012/21 — the Commissioner's view on when changes to a trust result in a new trust for CGT purposes.
• Australian Taxation Office — deceased estates guidance and ATO guidance on superannuation death benefits.
• ASIC — company directors and small business obligations.

Frequently Asked Questions