We’ve released a new taxpayer alert, TA2024/2, to inform entities and their advisers about our concerns regarding contrived arrangements seeking to circumvent Division 7A. The arrangements involve a profitable private company guaranteeing a loan made by a bank (or other financial institution) to a related private company with – minimal or no distributable surplus. Amounts are then loaned or paid to a shareholder or associate of a shareholder. We consider the arrangements are not effective and that Division 7A would apply to deem the private company which gave the guarantee to have paid an unfranked dividend. Alternatively, Part IVA of the Income Tax Assessment Act 1936 (the general anti-avoidance rule) may apply.If you've entered, or are contemplating entering, into an arrangement of this type, we encourage you to contact us as outlined in the Taxpayer Alert. Alternatively, seek independent professional advice. Remember, if something seems too good to be true, then it probably is.We’ve also released supplementary draft guidance, which is open for consultation. Draft Taxation Determination TD2024/D3 clarifies our view on an aspect of section 109U and documents our compliance approach.If this is relevant to you or your clients, we encourage you to read the alert and draft determination and have your say. Your feedback ensures our guidance provides the clarity you need. Visit the consultation hub to provide feedback.Consultation period for the draft determination closes 31 January 2025. Keep up to dateWe have tailored communication channels for medium, large and multinational businesses, to keep you up to date with updates and changes you need to know.Read more articles in our online Business bulletins newsroom.Subscribe to our free:fortnightly Business bulletins email newsletterExternal Linkemail notifications about new and updated information on our website – you can choose to receive updates relevant to your situation. Choose the 'Business and organisations' category to ensure your subscription includes notifications for more Business bulletins newsroom articles like this one.
Brief
On 11/12/2024, the Australian Taxation Office (ATO) issued an update regarding New Taxpayer Alert for arrangements circumventing Division 7A. The alert warns entities and their advisers about contrived arrangements that aim to evade Division 7A, with potential implications of Part IVA of the Income Tax Assessment Act 1936 applying instead.
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Purpose
The Australian Taxation Office has released a new taxpayer alert, TA2024/2, aimed at informing entities and their advisers about contrived arrangements designed to circumvent Division 7A. This alert serves as a warning to taxpayers who may be contemplating entering into such arrangements, highlighting the risks of being deemed as having paid an unfranked dividend by the Australian Taxation Office.
Effects on Industry
The taxpayer alert is likely to have significant effects on the private company sector, particularly those entities involved in contrived guarantee arrangements. This alert may lead to increased scrutiny and audits from the Australian Taxation Office, potentially resulting in financial penalties or reputational damage for non-compliant entities. Additionally, this alert may also impact the banking and financial institution sectors, as they will need to re-evaluate their lending practices and ensure compliance with Division 7A.
Relevant Stakeholders
The taxpayer alert is relevant to a wide range of stakeholders, including:
- Private companies involved in contrived guarantee arrangements
- Shareholders or associates of shareholders who may be receiving loaned or paid funds from related private companies
- Bankers and financial institution employees responsible for lending practices
- Tax professionals and accountants advising clients on tax strategies
- Business owners and directors seeking to ensure compliance with Division 7A
Next Steps
To comply with this update, taxpayers are encouraged to:
- Review their current arrangements to ensure they do not contravene Division 7A
- Seek independent professional advice from a tax expert or accountant
- Consult the supplementary draft guidance on section 109U and documents the Australian Taxation Office’s compliance approach
- Provide feedback on the draft determination by 31 January 2025
Any Other Relevant Information
The taxpayer alert is part of a broader effort by the Australian Taxation Office to enhance tax compliance and prevent contrived arrangements. The release of supplementary draft guidance on section 109U demonstrates the agency’s commitment to providing clarity and ensuring compliance with Division 7A. Stakeholders are encouraged to engage with the consultation process to ensure that the guidance provides the necessary clarity for their specific situations.
