Variable Prepaid Forward Contracts in Australia (2025 Guide)

Variable prepaid forward contracts (VPFCs) have become an increasingly popular tool for sophisticated Australian investors seeking both liquidity and flexibility in managing large shareholdings. As we move into 2025, a shifting regulatory landscape and evolving tax rules mean that understanding these instruments is more critical than ever.

What Is a Variable Prepaid Forward Contract?

At its core, a VPFC is a financial agreement that allows an investor to receive an upfront cash payment in exchange for agreeing to deliver a variable number of shares (or their cash equivalent) at a future date. Unlike a traditional sale, the exact number of shares delivered depends on the share price at contract maturity. This structure offers downside protection and the potential to benefit from some upside appreciation.

• Liquidity without Immediate Sale: Investors can access cash now while postponing the sale of their shares, which can be attractive for those who don’t want to trigger capital gains in the current tax year.
• Downside Protection: The contract can be structured to provide a minimum value, helping shield investors from major losses if the stock falls.
• Upside Participation: Investors retain some benefit if the share price rises, though typically this is capped.

For example, suppose an executive at an ASX-listed company holds $5 million worth of shares. Instead of selling outright, they enter a VPFC, receive $4 million upfront, and agree to deliver between 80,000 and 120,000 shares in two years, depending on the share price then. If the share price rises, they deliver fewer shares; if it falls, they deliver more (up to the contract cap).

2025 Policy Updates: Taxation and Compliance

Australia’s tax treatment of VPFCs has evolved in recent years, and 2025 brings fresh considerations:

• Capital Gains Deferral: The ATO has clarified that entering a VPFC is not an immediate disposal for capital gains tax (CGT) purposes. CGT is generally triggered when the shares are delivered, not when the contract is signed.
• Interest Deductibility: The upfront cash received is considered a loan, and any interest component embedded in the contract may not be tax-deductible unless structured carefully.
• 2025 Anti-Avoidance Rules: New ATO guidance focuses on substance over form. If a VPFC is structured mainly to avoid tax—without real economic risk transfer—it may be challenged under Part IVA anti-avoidance provisions.

Investors should ensure that their VPFCs involve genuine risk transfer and clear commercial purpose, not just tax deferral. This is especially relevant for company founders, executives, and family offices managing concentrated share portfolios.

Who Should (and Shouldn’t) Use VPFCs?

While VPFCs can be powerful, they’re not for everyone. Here’s who may benefit most in 2025:

• Founders and Executives: Those with large, illiquid holdings in a single ASX-listed company looking to diversify exposure gradually.
• Family Offices: Managing intergenerational wealth and seeking to balance liquidity needs with long-term capital gains planning.
• High-Net-Worth Individuals: Particularly those wanting to hedge against share price volatility without triggering immediate CGT.

However, VPFCs are generally unsuitable for retail investors, those with diversified portfolios, or anyone uncomfortable with complex derivatives and legal documentation. They require careful legal, tax, and financial advice, as missteps can lead to adverse tax outcomes or regulatory scrutiny.

Risks and Real-World Examples

VPFCs are not without risk. If the share price plummets, investors may end up delivering a significantly higher number of shares, eroding their remaining stake. Conversely, if the share price soars, the upside is usually capped, limiting potential gains.

In 2024, several high-profile ASX company founders used VPFCs to unlock capital for philanthropic endeavours and private investments while managing tax events. However, one case drew ATO attention when the contract’s downside risk was so tightly limited it resembled an outright sale—highlighting the importance of genuine risk transfer.

Key Takeaways for 2025

• VPFCs offer unique liquidity and tax deferral for sophisticated Australian investors.
• 2025 ATO rules demand genuine economic risk and commercial rationale.
• Careful structuring is essential to avoid anti-avoidance scrutiny and unexpected tax bills.