A tax win for a group restructure

Recently the Federal Court considered the tax implications of the restructure of a group that occurred in late 2016. The ATO raised amended assessments of over $100 million even though there was no real profit or gain for the group when undertaking the restructure.

How could this happen?

The restructure had the prime purpose of ridding the group of Division 7A loans. These loans had been put on complying Division 7A loan agreements. These agreements required that minimum yearly repayments be made to various companies. The business had declining profits and it became impossible to fund the yearly repayments required by Division 7A.

A restructure was proposed by the taxpayer’s accountants to solve the problem. Using a capital gains tax rollover relief provision, the taxpayers effectively extracted value from their operating business by engaging in a selective share buy-back. The taxpayers used what was owed to them from the share buy-back to pay off the amounts (Division 7A loans) they had borrowed from various companies in the group.

Despite there being no profit made, the ATO said that the group restructure was undertaken in substitution for paying dividends. If dividends had been paid, so the ATO argued, they would have become assessable income to the shareholders and significant tax would have been paid instead of none.

The Federal Court said that the arguments of the ATO were wrong. The Court looked to the past history of the group and concluded that dividends had never been paid in the way the ATO was suggesting. Further, there was no profit made, so there was nothing to tax. The taxpayers won the case.

This case points out the fact that the ATO can still try to find something to tax even when there was no real gain. The reason for this is that the Australian taxation law does not (always) purport to tax real gains. Sometimes it can tax fictitious gains that have only been created because of the way the tax law is worded.

Also, it shows that the ATO sometimes gets things wrong. Sometimes business owners can be frightened or overawed by the ATO when it comes knocking. Don’t be. Take a deep breath and get good advice.

Contact our KMT advisers for assistance with business structure.

About our advisers

Michael Fox has been dedicated to his clients’ success, devising comprehensive wealth strategies for personal and business growth for over four decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value, and smoothing transitions to the next generation. Please do not hesitate to reach out if you need assistance.

Chrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. She empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Her commitment to building trust and lasting relationships goes beyond professional excellence; it’s a personal ethos. By actively listening and understanding her clients’ businesses and goals, Chrisanthe thrives on collaborative efforts to navigate challenges and collectively achieve their aspirations. Please do not hesitate to reach out if you need assistance.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.