Tax Tip 401: Don’t Gift to a Company as it could be taxed on the way out

Discussion in 'Accounting & Tax' started by Terry_w, 25th Mar, 2022.

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  1. Terry_w

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

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    A common strategy is to make a gift of money or assets to a related entity for asset protection reasons and even estate planning reasons. This is generally done to parents or to the trustee of a discretionary trust.


    Gifting to a company should generally be avoided though – assuming it is not acting as trustee. This is because there will be tax issues in getting the money back in the future.


    Example

    Homer goes and sees an ‘asset protection’ expert – someone who has no training as a lawyer and doesn’t know anything about tax.



    Homer makes a $1mil gift to a new company he sets up. The company is a separate legal entity so the idea is if Homer gets sued the $1mil will be safe as it is no longer Homer’s asset. Homer has the trustee of a discretionary trust own the shares in the company. So he thinks the company is untouchable if he, Homer, where to become bankrupt.



    Later Homer considers himself to be low risk of getting sued so he wants his $1mil back and causes the company to make a gift to himself.

    S 109C ITAA 1936 – if the gift is to a shareholder or an associate of a shareholder it is taken to be a taxable dividend equal to the market value of the property gifted.



    The division 7A laws mean Homer will be taxed on the $1million as if it was paid to him as a dividend by the company and it will be an unfranked dividend. This could cost Homer almost $500,000 in tax!



    It might have been possible for Homer to have liquidated the company to have achieved a better outcome, but even better still if he had never gifted to a company at all.