Double tax shock awaits

AS they go through the books for the financial year just past, some small business owners operating groups of companies may find a nasty tax surprise.

‘Deemed dividend rules’ double-tax those business owners taking money from one company to another without setting up a loan arrangement.

The funds are deemed to be an unfranked dividend and taxed. Then the Australian Tax Office takes the credit out of the business’ franking account.

If the money is transferred out of a trust, the deemed dividend provisions bite immediately, whether a loan arrangement has been set up or not, thanks to provision 109UB – dubbed the “you bastard” provision by many accountants.

The deemed dividend law was set up to prevent business owners unfairly benefiting from the lower tax rate for companies.

While it is too late for businesses caught by the law this year, they can avoid a repeat next year.

Hall Chadwick partner Jon Carcich said declaring a dividend by June 30 would clear the loan account and avoid the deemed dividend rules.

He said the business owner also could set up a loan arrangement to the related company.

“But the business must pay interest on the loan and the loan must have a maximum term of seven years, if it is unsecured, or 21 years if it is secured,” Mr Carcich said.

Deloitte Growth Solutions partner Dudley Elliott said setting up a loan arrangement was difficult for most small business owners.

“Businesses can set up a loan facility covering the maximum amount owing at the end of the year but there are stamp duty costs attached to that,” he said.

“Most small businesses have a general view of their loan account, but it’s usually wrong.

“If they have a loan outstanding at the end of the year they are caught between a rock and a hard place because the deemed dividend rules apply.

“The liability usually arises through a lack of documentation but there are a lot of compliance costs to get around it.

“This forces the business owner to be focus backwards instead of looking forward on the business.”

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