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22/10/10: New ATO taxpayer alert

The ATO has released a new tax payer alert congruent to the application of Division 7A.

Taxpayer alert 2010/6 outlines an arrangement where a private company invests funds in an unrelated trust. The trust then lends these funds to a shareholder, or an associate of a shareholder, of the private company.

The ATO has recognised this arrangement as an attempt by the shareholder, or the shareholder’s associate, to access funds of the company without due regard to the application of Division 7A of Part III of the Income Tax Assessment Act 1936.

Division 7A is a measure aimed at preventing private companies from making tax-free distributions of profits to shareholders or their associates.

Under Division 7A, a private company may be assessed to have paid a dividend to a shareholder or an associate of a shareholder where it directly or indirectly makes a loan to them.

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