Dividend stripping revealed: an analysis of Lawrence's case

Abstract

A number of provisions scattered throughout the income tax legislation seek to deal with the evil of dividend stripping (primarily s 177E of ITAA 1936, s 207-145 and 207-150 of ITAA 1997). However nowhere in the legislation is there a definition of dividend stripping. This has been of concern to tax advisers because (in the absence of the availability of the CGT small business concessions) plain vanilla tax planning has traditionally favoured a shareholder who controls a private company with undistributed profits first stripping the profits out of the company by way of a dividend issue before selling the shares. Of course, it all depends on the tax profile of the company and the shareholder bur a scenario can be envisaged whereby the dividend would be tax free to the shareholder and any capital gain on the disposal of the shares minimised (or a loss generated). The more recent the acquisition of the company by the shareholder the greater the concern that the dividend stripping rules may have an application.