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  • Private company benefits

    We focus on arrangements that enable the extraction of wealth from private companies while avoiding the appropriate amount of tax, including transactions that:

    • are conducted through one or more interposed entities
    • involve excessive or non-arm's length payments.

    To target areas of concern, we continue to improve data matching processes across a range of sources to identify entities that received income or other benefit but haven't reported it and may have a tax liability.

    These areas of focus may include:

    Anti-avoidance rules may also apply to such arrangements.

    Director loans

    We focus 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 us.

    See also

    Dividend access share schemes

    Situations that attract our 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.

    We encourage taxpayers to review their affairs if they have entered into such arrangements.

    See also

    • TA 2012/4 Accessing private company profits through a dividend access share arrangement attempting to circumvent taxation laws
    • TD 2014/1 Income tax: is the 'dividend access share' arrangement of the type described in this Taxation Determination a scheme 'by way of or in the nature of dividend stripping' within the meaning of section 177E of Part IVA of the Income Tax Assessment Act 1936?

    Deemed dividend

    A deemed dividend 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.

    Our 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 conducted through interposed entities that seem artificial or lack commerciality, such as loans made through interposed entities where a reasonable person would conclude that a private company made a payment or loan to an interposed entity as part of an arrangement involving a payment or loan to a target entity
    • arrangements appear to be designed to avoid the application of Division 7A or otherwise achieve an inappropriate tax advantage.

    See Private company benefits – Division 7A dividends.

    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 our attention include:

    • private companies, including assessable trust distributions, not receiving payment of the distribution from the trust before the earlier of either  
      • the due date for lodgment
      • 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.

    See also

    Last modified: 09 May 2022QC 69482