Do you operate your business through a private company? Well, arrangements that extract wealth from private companies, while avoiding the appropriate amount of tax, are on the ATO’s radar.
Transactions that attract its attention include those that:
- Are conducted through one or more interposed entities; and/or
- Involve excessive or non-arm’s length payments.
To target areas of concern, the ATO continues to improve data matching processes across a range of sources to identify entities that received income or other benefits but haven’t reported it and may have a tax liability.
These areas of focus may include:
- Director loans;
- Dividend access share schemes;
- Deemed dividends;
- Unpaid present entitlements.
The anti-avoidance rules may also apply to such arrangements.
Director loans
The ATO focuses on:
- Directors who are shareholders of private companies and who report low levels of salary and wages with minimal other sources of income;
- Whether shareholders and their associates are maintaining a lifestyle that cannot be supported by the level of income reported to the ATO.
Dividend access share schemes
Situations that attract the ATO’s attention include:
- Using dividend access shares as part of a scheme to enable dividend stripping;
- Arrangements that involve the use of ‘dividend access shares’ to distribute accumulated profits of a company in a tax-free (or lower tax) form to an associate of the ordinary shareholders of the company.
The ATO encourages taxpayers to review their affairs if they have entered into such arrangements.
Deemed dividends
A deemed dividend (under Division 7A) may arise where a payment or other benefit is provided by a private company to a shareholder or their associate.
The payment or benefit provided can be treated as a dividend for income tax purposes even if the participants treat it as some other form of transaction, such as a loan, advance, gift or writing off a debt. The deemed dividend is included in the assessable income of the shareholder or their associate.
The ATO’s attention is attracted when:
- Amounts are taken from a company and not repaid;
- A complying loan agreement has not been put in place;
- Minimum yearly repayments on a loan are not paid;
- Income from interest on a loan is not declared;
- Company funds or assets are used for private purposes;
- Transactions occur through interposed entities which appear to be an arrangement involving a payment or loan from the company to a shareholder or their associate;
- Money has been borrowed directly or indirectly, from a company to repay an existing loan, or make minimum yearly repayments on a complying loan, from the same company;
- Payments are made on an existing loan (either the full amount or minimum yearly repayments) and when the payments were made, the shareholder or their associate intended to, directly or indirectly, reborrow a similar or larger amount from that company;
- Arrangements appear to be designed to avoid the application of Division 7A or otherwise achieve an inappropriate tax advantage.
Unpaid present entitlements
An unpaid present entitlement (UPE) is where a private company is a beneficiary of a trust and is presently entitled to an amount of trust income but does not actually receive payment of that distribution.
Situations that attract the ATO’s attention include:
- Private companies, including assessable trust distributions, not receiving payment of the distribution from the trust before the earlier of the due date for lodgment and the date of lodgment of the trust’s tax return for the year in which the present entitlement arose;
- A failure to put funds retained by the trustee in a sub-trust for the sole benefit of the private company beneficiary;
- A failure to pay the UPE at the conclusion of the term specified in an investment agreement;
- Arrangements releasing the trustee from having to pay the UPE to the private company beneficiary.
Contact our KMT advisers for tax advice before extracting wealth from your company.
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.
