The ATO on Thur 12.7.2012, issued Taxpayer Alert TA 2012/4 warning taxpayers of arrangements where accumulated profits of a private company are distributed substantially tax-free to an entity associated with the ordinary shareholders of the private company.
The ATO said the dividends are generally distributed on a new class of shares which the private company has created and issued to the associated entity for nominal consideration. In addition, it said the dividends will often be fully franked such that the associated entity will bear little or no additional income tax.
Among other things, the ATO considers the arrangements may be a scheme by way of, or in the nature of, or have substantially the effect of, dividend stripping under s 177E of the ITAA 1997. In addition, the ATO says the arrangements may also be a scheme to which Pt IVA may apply.
[LTN 133, 12/7]