The ATO has recently issued a Taxpayer Alert warning that it is reviewing arrangements where an individual taxpayer accesses the profits of a private company in tax-free form through the use of an interposed holding company. It notes that the Alert will apply to all arrangements when, viewed objectively, there is an indication that the dominant purpose of the arrangements is for the individual to avoid tax. Learn more with this article from our experienced accountant in Melbourne.
According to the ATO, these arrangements generally have the following features but may also include variations where the shares in the first company are pre-CGT shares or a holding company is interposed between a trustee shareholder and a company:
As outlined in the above scenario, company A could have provided its accumulated profits to the individual by simpler means, such as paying a dividend or providing an interest-free, unsecured loan (assessable as a deemed dividend under ITAA 1936 Div 7A), both of which attract tax consequences for the individual. Hence, when viewed objectively, the purpose of the interposed entity appears to have a dominant purpose of avoiding tax.
Besides the general anti-avoidance provisions in ITAA 1936 Pt IVA, the ATO will be actively reviewing these and similar arrangements to look for intention to repay the loan to decide whether the amount may be assessable under Div 7A. In addition, if the arrangements are found to be a “dividend stripping” scheme or operation, various legislation could apply to include the amount of the loan in the individual’s assessable income, and cancel the franking credit on the dividend paid to the interposed company.
If you’ve inadvertently entered into this scheme through a promoter, we can help you avoid any potential penalties and unwind any unsavoury arrangements. If you’re not sure whether your current structure or dividend arrangements will come under future ATO scrutiny, we have the expertise to advise you. Whether you need personal accounting advice or accounting services for small business, find out how we can help.
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