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Case File #31: The Lost Minute
The Dividend Trap
Arthur ran his engineering firm with a 'cash is king' mentality. When the company had a surplus, he drew funds for his lifestyle, telling his accountant, 'We’ll fix the paperwork at tax time.' He died suddenly in April, two months before the financial year ended.
Because there was no signed director’s minute (document) preceding the payments, the ATO refused to recognise the drawings as dividends. They re-characterized $285,000 as an unfranked loan under Division 7A. Arthur’s grieving family was hit with a massive tax bill and the loss of all franking credits - a $100,000 penalty for a document that would have taken sixty seconds to sign.
- Clinical Mystery: Why did a $2M loan from a father to a son become an 'unconditional gift'?
- The Human Intent: To keep family finances 'informal' and avoid the 'clutter' of official loan agreements
- The Diagnosis: The Presumption of Advancement: In family, the law assumes a transfer is a gift unless you have a 'Minute' to prove otherwise
