Description
A private company ("the target company") has accumulated significant profits which have been subject to income tax at the company tax rate. 2. The target company's ordinary shares are held by one or more individuals ("the original shareholders") who may also be the target company directors. 3. A tax intermediary recommends the following steps to the controller(s) of the target company. 4. The target company creates a new class of shares that has some or all of the following characteristics: a. a right to receive a dividend distribution at the discretion of the target company's directors; b. a lack of any voting rights or rights to participate in surplus assets of the target company upon its winding up; c. a right by the target company to redeem the new shares within four years of the share's issue date; and/or d. a right by the target company to abolish dividend entitlements on the new shares within four years of the share's issue date. 5. The new shares are issued to an entity or entities ("the new shareholders") that are closely associated with the ordinary shareholders of the target company. 6. The new shareholders pay nominal consideration for the new shares. 7. Significant profits accumulated in the target company are then distributed as a dividend to the new shareholders, potentially with franking credits. 8. A series of transactions is entered into as a means to transfer the economic benefits of all or some of the distributions to the control of the original shareholders/associates with a purpose of securing a better tax outcome. In some cases, these transactions may be delayed for some time, for example, the distributions may be planned to spread over a four year period. 9. The original shareholders and their advisers may cite a commercial rationale, such as asset protection, for this type of arrangement. The nature of the transactions may involve the use of promissory notes and/or a 'round robin' bank facility that involves funds instantaneously flowing through accounts to create transaction records. 10. In certain arrangements the funds represented by the dividend distribution may be: a. lent to the original shareholders and/or their associates; b. distributed to a trust, or an individual, that has carry forward tax losses, which may result in no further tax being paid and may generate a refund of franking credits; c. distributed through a series of trusts and companies and ultimately end up in the hands of, or the control of, the original shareholders and/or their family in a manner which attracts no or minimal additional tax; or d. distributed to a non-resident and not subject to any further Australian tax. The non-resident then loans a comparable amount back to the target company. 11. The accumulated profits of the target company are effectively placed in the hands of, or in the control of, the original shareholders and/or their family in a substantially (or entirely) tax-free form.