Taxpayer alert on interposing a holding company to access company profits tax-free
In TA 2023/1, the ATO has flagged that it is reviewing arrangements whereby:
- a holding company is interposed between a private company with retained profits and its shareholder;
- a CGT roll-over is applied to disregard the CGT consequences of that interposition;
- the private company then pays a franked dividend to the holding company; and
- the holding company uses the proceeds from the dividend to fund a loan to the individual on terms that do not comply with section 109N of the ITAA 1936.
The ATO is concerned that taxpayers are entering into these kinds of arrangements under the misapprehension they are effective in avoiding additional tax being paid by the individual taxpayer (i.e. ‘top-up tax’). Specific aspects of such arrangements that concern the ATO include whether:
- there is any intention for the ‘loan’ from the holding company to the individual to be repaid, or whether the amount is an assessable dividend pursuant to section 109C;
- the arrangement constitutes a dividend stripping scheme or operation, such that section 177E applies to include the amount of the ‘loan’ in the individual taxpayer’s assessable income and section 207-145 of the ITAA 1997 applies to cancel the franking credit on the dividend to the holding company; or
- the arrangement constitutes a scheme to which Part IVA could apply.
Draft legislative instrument regarding alienated PSI withholding issued
LI 2023/D1 will, if enacted:
- vary to nil the amount a personal services entity is required to pay to the Commissioner when it receives alienated personal services payments in certain circumstances; and
- in so doing, continue existing withholding arrangements for alienated PSI under F2013L00522, which is due to sunset.