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On 15 February 2011, the ATO issued Taxpayer Alert TA 2011/1, entitled "Loans to members of companies limited by guarantee and the operation of Division 7A".

Under the targeted arrangements, a company limited by guarantee is established to receive income distributions from a trust and then lends that money to directors, members or associates of that company or related parties. Minimal or no interest or principal is paid on the loans. The stated purpose of the company is to protect its assets, however the only assets held are these loans.

In media release No 2011/10, issued the same day, the Commissioner, Michael D’Ascenzo, said: "The use of a company limited by guarantee makes no commercial sense, aside from the tax advantage sought from these arrangements. These types of companies cannot distribute profits to members or utilise any franking credits obtained. The anti-avoidance provisions may apply to these arrangements which are subject to further analysis from the ATO. We will also be writing to entities facilitating these arrangements about our concerns that they may risk contravening the promoter penalty laws."

Anyone who has participated in these arrangements should come forward prior to 30 April 2011 and before they are contacted by the ATO. If they do, they will be entitled to a reduction in any tax penalties.


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