The transactions we monitor
Transactions that attract our attention, include those 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:
- director loans
- dividend access share schemes
- deemed dividend
- unpaid present entitlements.
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.
For information on private company benefits, see Payments and other benefits affected.
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.
For more information on dividend access share arrangements, see:
- 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 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 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.
For more information on arrangements that avoid the application of Division 7A, see Taxpayer Alert TA 2023/1 Interposition of a holding company to access company profits tax-free.
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.
For information on the tax avoidance taskforce for trusts, see What attracts our attention.
We focus on arrangements that extract wealth from private companies while avoiding the appropriate amount of tax.