The Australian Taxation Office (ATO) has issued a warning to people who are using an interposed holding company to avoid paying taxes. This happens when someone who owns a private company (called “Company A”) with profits that have been taxed at the corporate rate sells their shares to another private company (the “interposed company”) and receives shares in the interposed company in return. The shares in the interposed company are worth the same amount as the profits of the first company.

The individual can then apply a tax rule called CGT roll-over, which means they don’t have to pay taxes on any capital gains they make from selling their shares in Company A. Company A then pays a dividend to the interposed company, which in turn gives the individual a loan using the dividend money. The loan may be interest-free and repayable whenever the individual wants.

This scheme allows the individual to avoid paying taxes they would have had to pay if they had received the money as a dividend or an interest-free loan directly from Company A. The ATO thinks this scheme is being used mainly to avoid paying taxes.

The ATO will be looking into these types of schemes and will assess whether the loan should be treated as a deemed dividend (which means it will be taxed). If the scheme is considered to be “dividend stripping”, the individual may also have to pay taxes on the loan and the franking credit on the dividend paid to the interposed company may be cancelled.