Right on the heels of the recent Guardian court appeal where the commissioner succeeded in applying the anti-avoidance provisions in Part IVA, the Australian Taxation Office has released taxpayer alert TA 2023/1 Interposition of a holding company to access company profits tax-free. This alert advises that the ATO is currently overlooking arrangements where the following occurs:
- The original company is owned by individuals/trustee and has retained profits, with available franking credits to pay franked dividends
- A company is interposed between a private company and the individual/trustee through the utilisation of a CGT rollover – deferring any capital gains tax
- The original company pays a franked dividend to the new interposed company, which is paid by either cash, cheque or promissory note
- The interposed company utilises the dividend payment to provide a loan to the individual and the loan is not on a company division 7A loan, such as interest free or repayable at call
- Neither the first company or the interposed company have a distributable surplus per the division 7A provision to deem a dividend payable to the individual
The ATO considers where an arrangement displays all or most of these features the arrangement would have a dominant purpose of tax avoidance.
The below example from the Tax Alert illustrates the broad features of the arrangements that the ATO is concerned with.
Example from Tax Alert:
- Jack is the sole shareholder and director of AustCo Pty Ltd (AustCo), an Australian private company. As at 31 May 2020, he has 10 ordinary shares in AustCo fully paid up to $1 each. AustCo has cash at bank of $1 million, consisting of the $10 paid-up share capital and accumulated profits of $999,990 from prior year trust distributions. AustCo has no other assets. Jack wants to access the retained profits for private purposes.
- On 4 June 2020, Jack incorporates a company, HoldCo Pty Ltd (HoldCo), for which he is the sole director and shareholder, holding one ordinary share fully paid up to $1.
- On 15 June 2020, Jack transfers his 10 ordinary shares in AustCo (valued at $1 million) to HoldCo and, in return, HoldCo issues Jack a million ordinary shares fully paid up to $1 each. Both Jack and HoldCo adopt the amount of $1 million as being the consideration for the transaction.
- Jack makes a choice for roll-over relief under Subdivision 122-A of the ITAA 1997. Accordingly, the capital gain made by Jack from the disposal of his AustCo shares to HoldCo is disregarded.
- On 29 June 2020, AustCo declares and pays a fully franked dividend of $999,990 to HoldCo, as its only shareholder.
- On 30 June 2020, HoldCo lends $999,990 to Jack on terms which are unsecured, interest-free and repayable at call.
- The accounting records for both HoldCo and AustCo show nil distributable surplus as at 30 June 2020.
As at 30 June 2020, the accounting records of HoldCo provide that the $1,000,001 net assets (consisting of $999,990 loan receivable, 10 shares in AustCo fully paid up to $1, and $1 cash at bank) is equal to the amount of paid-up share capital ($1,000,001). The accounting records of AustCo provide that the $10 net assets ($10 cash at bank) is equal to the amount of paid-up share capital ($10).
Therefore, Division 7A does not operate to treat Jack as having received a dividend in the 2019-20 income year.
- AustCo is then wound up. The loan remains uncalled and outstanding.
- Putting to one side the taxation outcomes, AustCo could have provided its accumulated profits to Jack by far simpler means, such as by paying him a dividend or providing him with an interest-free, unsecured loan (which would also be assessable as a deemed dividend under Division 7A).
- Viewed objectively, the arrangements appear to have the dominant purpose of avoiding tax.
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Please contact our Ulton Tax Advisory Team if you wish to discuss this recent tax payer alert further.
Sources
Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 (21 December 2021)
https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2021/1619.html?context=1;query=Guardian%20AIT%20;mask_path=au/cases/cth/FCA
TA 2023/1 Interposition of a holding company to access company profits tax-free
https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA20231%2FNAT%2FATO%2F00001%22
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