Last week the ATO issued a Taxpayer Alert, stating that they are reviewing arrangements where individuals are avoiding tax by receiving private company profits through interposed entities.
The insertion of an interposed company for commercial reasons such as asset protection, tax consolidation, or to attract new investors, is fairly common practice. Generally, such arrangements will not be the subject of this review, given they would not have a dominant purpose of tax avoidance.
However, we suggest that you ensure contemporaneous documentation and evidence exists to support its commercial reasoning, since arrangements may be reviewed for any of the following:
- A company is interposed between a private company with retained profits (first company) and its shareholder.
- A CGT rollover is applied to disregard the CGT consequences on the transfer of the shares in the first company, from the shareholder to the interposed company.
- The first company pays a fully franked dividend to the interposed company, which then loans the funds to the individual shareholder under terms which do not comply with Division 7A; and neither the first, nor interposed company have sufficient distributable surplus for Division 7A to treat the loan as a deemed dividend (resulting in the individual shareholder receiving the funds tax-free).
- When viewed objectively, the arrangements have the dominant purpose of tax avoidance.
When taking on new clients who appear to have any of the above features, always ensure to ask questions and obtain all relevant information, including previous advice and documentation to determine the inherited risk and best course of action for the client as part of this Taxpayer Alert.
Generally, Part IVA should always be a consideration where undertaking restructures, or utilising CGT rollovers, and proper care should be taken in documenting the purpose of the transaction/s.