Plan to target tax abuse ‘too broad’

Image: 123RF/Aleksandra Gigowska

The Treasury plans to tighten anti-avoidance rules dealing with dividend stripping to target tax abuse, but there are fears it might be casting its net too wide and that the proposed measures might also hit other unintended transactions.

The proposed changes are contained in the first draft Taxation Laws Amendment Bill, released for public comment by the Treasury in June.

They were mentioned in the budget review tabled in parliament and will come into effect retroactively from the date of the announcement (February 20) and apply to dividend-stripping schemes entered into on, or after, this date.

Pwc senior manager of tax technical Greg Smith said the main problem with the Treasury’s proposal was that it would bring transactions into the net that clearly should not be there, such as the issue of shares for an employee shareownership plan.

“It is overly broad,” he said. Smith said the Treasury would be publishing the full text of the 2019 draft Taxation Laws Amendment Bill for public comment later this week, and changes could be made to the initial proposals regarding dividend stripping to take account of public comments.

Dividend stripping normally occurs when a shareholder company that intends to disinvest in a target company avoids income tax (including capital gains tax) that would ordinarily arise on the sale of shares.

This is done by the shareholder company ensuring the target company declares a large dividend to it before the sale.

This pre-sale dividend, which is exempt from dividends tax for residents, decreases the value of the shares in the target company and, as a result, the shareholder company can sell the shares at a lower amount, thereby avoiding a larger capital gains tax burden.

“It has come to government’s attention that certain taxpayers have embarked on abusive tax schemes aimed at circumventing anti-avoidance rules dealing with dividend stripping arrangements ,” the Treasury said in its explanatory memorandum. 

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