ATO Warns Against Practice Of Profit Stripping

by Mary Swire, Tax-News.com, Hong Kong

29 January 2004

The latest ‘Taxpayer Alert’ issued by the Australian Taxation Office has warned businesses using manipulated share losses as a way of reducing taxation that they may face investigation under a new ATO crackdown.

According to the Tax Office, these arrangements typically involve a company with profits (Company A) buying shares in another (Company B) at premium rates. The rights associated with these shares are then varied to restrict the amount payable on liquidation, which reduces their value.

Company A makes a book loss on its shareholding, which it offsets against its profits. Company B, whose assets are broadly the amount paid by Company A for its now worthless shares in company B, is then liquidated.

“The arrangements appear contrived and artificial with the intent of transferring profits to shareholders and associates in a non-taxable form,” observed Tax Commissioner, Michael Carmody.

He noted that these arrangements may run counter to the provisions of the Tax Act, including general anti-avoidance rules, and shareholders of firms participating in such schemes could face amended assessments, interest charges and other penalties.

Recommended