This structure generally involves a Holding Company owning the shares in a Trading Company. The Trading Company will then transfer its Retained Earnings to the Holding Company on a regular basis via Franked Dividends. This means that if the Trading Company is Liquidated, the profits of the Trading Company are not lost completely because most of the profits have already been transferred into the Holding Company (either in cash or accrued in unpaid Dividends).

As this represents a Non-Portfolio Dividend, the Dividend paid to the Holding Company is not considered to be Base Rate Entity Passive Income for the purposes of working out whether the Holding Company has access to the Reduced Corporate Tax Rate. This differs from the use of a Bucket Company, where excess Retained Earnings of the Trading Company are distributed to the Bucket Company via a distribution from a Discretionary Trust (which owns the Trading Company). In this case, the Dividend paid to the Bucket Company, is considered to be Base Rate Entity Passive Income. This means that where the Trading Company pays a Franked Dividend (at the franking rate of 27.5%) to the Bucket Company (which would be required to pay tax at the general Corporate Tax Rate of 30%), the Bucket Company may have to pay top up tax on the Dividend.

Where the 50% Active Asset Reduction is being claimed on the sale of Active Assets of a Holding Company/Subsidiary there may be a poor tax outcome. Therefore, consideration would need to had in relation to the interaction of the Active Asset Reduction if you intend to adopt a Holding Company Structure and plan to develop a business/Company for eventual sale.

The asset protection benefits from using a Holding Company are less effective where Insolvent Trading occurs in the Trading Company.

Section 588V of the Corporations Act 2001, states that a Holding Company is liable for the debts of a subsidiary where there are reasonable grounds for suspecting that the subsidiary is insolvent (but the subsidiary continues to incur debts) and the Holding Company in the subsidiary’s circumstances would be so aware, or one of more Directors of the Holding Company would be so aware.