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ATO Probes Another Avoidance Scheme

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

08 June 2007


The Australian Tax Office (ATO) has announced that it is investigating another avoidance scheme, this time relating to arrangements that attempt to circumvent Division 7A tax laws to avoid paying tax on shareholder dividends through the use of what is claimed to be a corporate limited partnership (CLP).

Tax Commissioner Michael D’Ascenzo said the Tax Office is concerned about arrangements where the profits from a private company are transferred to a CLP. The profits are then paid back to shareholders disguised as a loan.

D’Ascenzo warned companies, shareholders and their associates need to be careful when following advice of promoters of these types of arrangements.

“The anti-avoidance provisions may apply to such schemes and we are investigating further,” Mr D’Ascenzo said.

Under one example of such an arrangement, a private company with accumulated profits (the Profit Co) wishes to make distributions to a shareholder (or their associate) that would trigger Division 7A if made directly. A structure, said to be a CLP, is established and the constitution of the Profit Co is amended to create a new class of shares which are subsequently issued to the 'CLP' for a nominal value. The Profit Co pays a fully franked dividend to the CLP which amounts to the accumulated profits held in the Profit Co. This payment effectively reduces the Profit Co's distributable surplus for Division 7A purposes to nil. The Profit Co enters into a loan agreement with the CLP whereby an amount equal to the dividend paid to the CLP is lent back to the Profit Co. The Profit Co uses the funds borrowed from the CLP to make a loan to a shareholder (or their associate). The amount treated as a dividend under Division 7A in respect of this loan is nil as the Profit Co has no distributable surplus. In some arrangements a variation is used where the CLP lends the funds received from the Profit Co directly to a shareholder of the Profit Co (or the shareholder's associate) as an alternative to lending the funds to the Profit Co to lend to a shareholder (or their associate).

A further variation involves the Profit Co being presently entitled to income of a trust (but where that income has not been paid to the Profit Co) and the trustee has made a loan to a shareholder of the Profit Co (or the shareholder's associate). In such arrangements, after the Profit Co pays a fully franked dividend to the CLP, the CLP lends to the trustee an amount equal to the dividend received. The trustee then uses these funds to pay the outstanding entitlements owed to the Profit Co.

On Tuesday, the ATO announced that it is investigating trust arrangements that are being used to reduce tax on options and shares acquired under an employee share scheme. The Tax Office has also recently issued an alert regarding arrangements that seek to reduce tax on Australian income through the use of foreign tax credits.


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