Important considerations before changing your company shareholders

Bringing in a new partner into your business, rewarding a key employee with a stake, or passing the company down to the next generation are all exciting milestones. It's easy to get caught up in the moment and think that changing who owns the shares is as simple as updating a form. ​

However, a change in shareholding is a major business decision with significant financial and legal implications. We've seen clients make a quick change, only to face unexpected tax bills or complications down the line. ​

Before making any shareholder changes, it's crucial to understand what's involved. Getting it right from the start protects everyone involved and saves a lot of future headaches. Here's a simple rundown of the key things you need to consider.​

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Does your company have tax losses from previous years? Normally, you can carry these forward to reduce tax on future profits. However, if your company's ownership changes, you may lose the ability to use those losses. ​

In Australia, companies must satisfy either the Continuity of Ownership Test (COT) or the Same Business Test (SBT) to retain access to prior year tax losses. Broadly, this means the same shareholders must hold more than 50% of the voting, dividend and capital rights, or the company must continue to operate the same business after the ownership change. ​

If these tests are failed, the company may forfeit the ability to use carried forward tax losses.​

Franking credits represent tax your company has already paid on its profits. When dividends are paid, these credits are attached to avoid double taxation and reduce the tax shareholders pay personally. ​

If there is a significant change in shareholding or control, the company may fail the franking credit integrity rules, particularly the holding period rule and related payments rule, or trigger anti-avoidance provisions. In some cases, this can limit the ability of new shareholders to benefit from existing franking credits. ​

You may think this is not relevant if you do not regularly pay dividends. However, retained profits are often distributed later, including on wind-up of the company. If franking credits cannot be effectively used, shareholders may end up paying tax at their full marginal rate.​

Often, shareholders lend money to the company or borrow from it. This is tracked through shareholder loan accounts. ​

In Australia, these arrangements are closely monitored under Division 7A rules. If a shareholder owes money to the company and it is forgiven, written off, or not placed on a complying loan agreement, the amount may be treated as an unfranked dividend and become taxable in the shareholder's hands. ​

Before any shareholder exits, these balances must be properly reviewed and settled.​

All share transactions must be recorded at a realistic price for tax purposes. Even if you're passing shares to a family member, the ATO expects the transaction to reflect market value. ​

This is particularly important for Capital Gains Tax (CGT) purposes. Transferring shares below market value can still trigger a CGT event based on the market value of the shares at the time of transfer.​

When you reward employees with shares in the company, this often falls under Employee Share Scheme (ESS) rules, which have their own tax treatment. ​

If shares are provided at a discount to market value, that discount is generally treated as taxable income for the employee, even if no cash changes hands. There are specific concessions and deferral rules available under ESS legislation, but these schemes must be structured carefully.​

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While the tax and accounting side is critical, there are a few other things to be aware of when changing shareholders.​

Any change in shareholding must be reflected in your company register and reported to ASIC within the required timeframe. ​

If you have a shareholder agreement, it is a legally binding document that must be followed. It should outline what happens if a shareholder wants to sell, passes away, or if a dispute arises. If you don't have one, this is a good time to speak with a lawyer. ​

If a shareholding change results in a foreign individual or entity acquiring a substantial interest in your company, you may need approval from the Foreign Investment Review Board (FIRB) before the transfer takes place. ​

This commonly applies where a foreign person acquires 20% or more of the company, or where multiple foreign persons together hold 40% or more. Different thresholds and additional rules can also apply if your business operates in sensitive sectors such as land, infrastructure, data, energy, or media. ​

This is not a tax issue, but a legal approval requirement. Failing to obtain FIRB approval before the transaction can lead to serious penalties and the transaction being unwound. ​

While your accountant handles valuation and tax implications, a lawyer should manage the legal paperwork, including share transfer forms, updates to the constitution, and any changes required to existing agreements. ​

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As you can see, there's a lot to consider. Getting professional advice before making any shareholder changes helps ensure the process is smooth, compliant, and free of costly surprises later.​