Tax Tip 238: What is Dividend Stripping?

Discussion in 'Accounting & Tax' started by Terry_w, 5th Sep, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Tax Tip 238: What is Dividend Stripping?


    Dividend stripping is basically the selling of shares of a company to a new entity before the dividend is paid so that the income of the dividends ends up in the hands of the new owner and not the old owner.


    Example

    Bart is a shareholder of Bartism Pty Ltd with retained earnings of $500,000. Once the dividends are paid out the company is only worth about $50,000 so Bart sells his shares to the trustee of the Bart Trust for $50,000 and the company pays a dividend after this to the trust instead of Bart. The trust can distribute the income to lower tax paying beneficiaries and heaps of tax will be saved.


    What’s wrong with this? It should be obvious, but it can be a scheme with a dominant purpose of tax savings.

    The ATO Commissioner can therefore attack this sort of sale under Part IVA – s 177E of the ITAA 1936. This could mean the tax benefits are denied as well as penalties of up to 90%.
    INCOME TAX ASSESSMENT ACT 1936 - SECT 177E Stripping of company profits
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    @Terry_w - I thought this was going to be an article about the Mens Club next to the ASX. :rolleyes:
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Part IVA would apply on that too
     
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  4. Redwing

    Redwing Well-Known Member

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    [​IMG]
    That'll confuse the ATO
     
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  5. Mike A

    Mike A Well-Known Member

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    ChrisP73 and Terry_w like this.
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Agree that seeking a ruling is important and the predominant purpose to restructure etc can and will have a very important bearing on the outcome. Asset protection etc can be a important element of tax strategies

    By paying a dividend to New Co the cash reserves will now be sitting in New Co which would provide a level of protection against claims made on Company X.
     
  7. Mike A

    Mike A Well-Known Member

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    Arguing asset protection is the dominant purpose wont help to prevent dividend stripping applying.
     

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