Tax office issues alert signalling its intention to crack down on family business share arrangements

The Australian Tax Office has issued a tax payer alert warning against the use of dividend access share arrangements to circumvent taxation laws, in a move which is set to turn the spotlight on family businesses.

The alert revealed that the ATO will be examining dividend access share arrangements which seek to place the profits of private companies in the hands of shareholders or their associates in a substantially tax free form.

Under these arrangements, a private company with substantial accumulated profits issues a new class of shares to associates of the private company’s ordinary shareholders for nominal consideration.

The new shares often carry no voting rights but include the opportunity, not the right, to receive a dividend.

The accumulated profits of the private company are then distributed to the new entity or entities and they pay less tax than would have been the case if the dividends were paid to the original shareholders of the private company.

“The ATO is concerned that these arrangements are set up with the dominant purpose of avoiding tax,” Tax Commissioner Michael D’Ascenzo said.

“While some arrangements may be claimed to be done for commercial and other non-tax purposes, we will be closely examining whether the way these arrangements have been set up would show a tax avoidance purpose.”

Deepti Paton, tax counsel at the Tax Institute, told SmartCompany legitimate users of dividend access share arrangements were safe.

“It’s a crackdown in the sense that if they have a tax payer alert out, they are looking for these circumstances but people who have been using dividend access share arrangements legitimately should not be worried,” she says.

“That being said the test here is the ‘dominant purpose’ of tax avoidance which is an ambiguous test, we jokingly say in the industry it is a smell test.”

Paton says the ATO has always had a focus on family businesses because of the lack of transparency in private businesses as many do not report publicly.

“The ATO has always had a degree of interest in that market which is very specific, that is borne out in compliance programs in previous years,” says Paton.

Paton says dividend access share arrangements are used by many family businesses for legitimate purposes.

“Out of a private company you can issue a number of different classes of shares and the flexibility given to a private business which is a family business is a bit greater, there is more control and scope to define the rights attached to shares,” she says.

“It feels like a big reach in this instance because there are so many reasons people use dividend access shares including estate planning and family businesses can be complex structures because different people contribute to the business in their own way and families should be able to reward contributions in different ways.

“The use of dividend access shares is not new, streaming in the context of trusts has been accepted by industry and so it is not a concept that is an abhorrent or one that is unsupported by the tax system at large.”