A private company with accumulated profits ('the Profit Co') wishes to make distributions to a shareholder (or their associate) that would trigger Division 7A if made directly.
A structure, said to be a CLP, is established ('the CLP') and the constitution of the Profit Co is amended to create a new class of shares which are subsequently issued to the 'CLP' for a nominal value.
The Profit Co pays a fully franked dividend to the CLP which amounts to the accumulated profits held in the Profit Co. This payment effectively reduces the Profit Co's distributable surplus for Division 7A purposes to nil.
The Profit Co enters into a loan agreement with the CLP whereby an amount equal to the dividend paid to the CLP is lent back to the Profit Co.
The Profit Co uses the funds borrowed from the CLP to make a loan to a shareholder (or their associate). The amount treated as a dividend under Division 7A in respect of this loan is nil as the Profit Co has no distributable surplus.
In some arrangements a variation is used where the CLP lends the funds received from the Profit Co directly to a shareholder of the Profit Co (or the shareholder's associate) as an alternative to lending the funds to the Profit Co to lend to a shareholder (or their associate).
A further variation involves the Profit Co being presently entitled to income of a trust (but where that income has not been paid to the Profit Co) and the trustee has made a loan to a shareholder of the Profit Co (or the shareholder's associate). In such arrangements, after the Profit Co pays a fully franked dividend to the CLP, the CLP lends to the trustee an amount equal to the dividend received. The trustee then uses these funds to pay the outstanding entitlements owed to the Profit Co.
The income of a discretionary trust has in prior years been appointed in favour of a private company with accumulated profits ('the Profit Co'). A shareholder of the Profit Co (or the shareholder's associate) wishes to enjoy the net income of the trust without triggering section 109UB or Subdivision EA of Division 7A.
A structure, said to be a CLP, is established (the 'CLP') and the trust deed of the discretionary trust is amended to add the CLP as an additional discretionary object.
The trustee appoints a share of the income of the trust in favour of the CLP and pays that purported present entitlement to the CLP.
The CLP lends the funds received from the trustee to a shareholder of the Profit Co (or the shareholder's associate).
In some arrangements a variation is used where the trustee does not pay the purported present entitlement of the CLP and instead lends an amount equal to the unpaid purported present entitlement to a shareholder of the Profit Co (or the shareholder's associate).
By appointing a share of the income of the trust in favour of the CLP rather than the Profit Co, the application of section 109UB and Subdivision EA of Division 7A is sought to be circumvented.
Further variations of arrangements 1 and 2 above may include the use of multiple trust structures.