A practice in Australia whereby business profits are claimed to be diverted into a partnership - with a big tax avoidance as a result - has drawn the ire of the country's tax authority.

Australia’s tax authority is scrutinising what it says are “contrived arrangements” in which business profits are diverted to partnerships to avoid paying tax.

The Australian Taxation Office said it is reviewing arrangements where a purported partnership with a private company partner is used to enable individuals to access business profits without paying top-up income tax at their marginal rates of tax.

“We’re seeing contrived arrangements where business profits are claimed to be diverted to a partnership and as much as 99 per cent of profits are allocated to the private company and taxed at the 30 per cent tax rate,” Michael Cranston, deputy commissioner, said.

“The company typically doesn’t control or benefit from the profits. Rather, the money is loaned or paid to individuals who do not include the amounts in their assessable income avoiding ‘top-up’ income tax on what they receive,” Cranston said.

The profits are usually channelled to the partnership via a discretionary trust or through dividends from a private company, such as under a “dividend access share” arrangement, the ATO said in a statement on the issue. The partnership may also derive income from carrying on a business, it said.

“We are currently reviewing a number of cases that involve the arrangement and will continue engaging with taxpayers over the coming months,” Cranston said. “We’re finalising our view and consider that the arrangement may be ineffective at law. We encourage taxpayers who think they may be involved in such arrangements to contact us to make a voluntary disclosure or seek a private ruling,” he said, adding that affected taxpayers may want to consider talking to advisors not involved with such practices.