Deemed Dividend Rules: Tax Free Extraction of Profits and the Exploitation of Structural Foundations of the Income Tax Regime
Australian Tax Review (2020) 49(2) 87-109
26 Pages Posted: 2 Apr 2021
Date Written: August 3, 2020
Accessing profits of a company in a tax-free or favourable tax form has occupied the income tax planner for generations. For closely held companies, the integrity provisions in s 109 and Division 7A of the Income Tax Assessment Act 1936 (and before that s 108) generally mark out the distinction between a taxable distribution of profits as opposed to other non-taxable economic transactions. However, the designers of these integrity provisions would not have expected them to provide a tax planning opportunity, especially one that circumvents or exploits foundational features of the income tax. The shareholder-associate rule in s 109 and Division 7A does this by making the associate (with her own tax rate schedule), and not the shareholder, the proper taxpayer in receipt of an assessable unfrankable dividend. This design flaw provides the tax planning opportunity without the need to give the associate normal shareholder rights or a dividend access share in the company. As a result, tax-preferred income can be released from the company without potentially attracting a taxing point, and opportunities for streaming become available. The article sets out the tax planning opportunities provided by the shareholder-associate rule and how it can be used to exploit and/or circumvent foundational features of the income tax. From there, the article addresses the question as to whether the tax planning will ultimately succeed.
Keywords: income tax, dividends, anti-avoidance, GAAR, integrity provisions, tax planning, corporations law
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