6 tax questions to ask in a share sale agreement involving deferred payments & unfranked dividends

Get in touch: 1800 770 780

How can we help?

Written by Georgia Adams, CTA

When David’s local company issued a dividend on 1 July 2022 to its CEO and sole shareholder, David, its franking account did not have enough franking credits to allow it to fully frank the dividend. However, David assured you that the company would pay sufficient taxes before the end of the income year so that its franking account would not be in deficit by the end of the franking period.

Before this occurred, a large multinational unexpectedly offered to acquire his company on 2 July 2022.

Relieved, David accepted the offer to sell his shares under the terms of a share sale agreement which was to be executed on 3 July 2022, and pursuant to which the company would become a subsidiary within the multinational’s tax consolidated group.

The multinational told David that, as a standard measure to protect the future performance of its new subsidiaries, it always withheld payment of 33% of the sale price in a deferral arrangement for two years after the date of sale provided that certain financial objectives were met during this time.

It was at this moment that David realised that he had no legal representation in this transaction and that he was unsure about whether his earlier dividend is frankable.

He comes to you for advice with the following questions:

  1. Is David’s dividend paid on 1 July 2021 frankable?
  2. Is his company liable to franking deficit tax (FDT) at the time it joins the tax consolidated group?
  3. If so, when is its franking account return and any FDT due?
  4. Can his company claim the FDT liability as a tax offset?
  5. What are the CGT consequences of a payment deferral arrangement?
  6. Is there a more tax-effective way to structure the deferred payment?

You tell David that you are able to assist, and that there are many other tax considerations that ought to be reviewed including but not limited to CGT (including small business CGT concessions), GST and other general corporate tax issues.

If you are interested in discussing any of the above questions, please contact commercial lawyer and Chartered Tax Adviser, Georgia Adams, at Owen Hodge Lawyers on +61 9549 0700 or [email protected].

Just ask us a question

We are always ready to help you.