As we have previously reported, the Government announced in the 2017 Federal Budget that amendments would be made to Division 7A incorporating recommendations from the 2014 Board of Taxation’s final report on the ‘Post Implementation Review of Division 7A of Part III of the Income Tax Assessment Act 1936’ (the earlier report). The start date was to have been 1 July 2018, although the Government in the 2018 Federal Budget deferred the start date to 1 July 2019.
Yesterday, Treasury released a Consultation Paper to seek stakeholder views on proposed amendments to Division 7A that draw on but includes significant departures from the recommendations in the earlier report.
Some key elements of the proposed new regime outlined in the Consultation Paper include:
New “simplified” single ten-year loans with interest charged at the Reserve Bank overdraft rate for small business (which is higher than the current Division 7A rate – for September 2018 it was 8.3% compared with 5.20% for the current Division 7A rate).
Not adopting the amortisation model with principal repayments at the 3, 5, 8 and 10 years from the earlier report. Instead requiring annual interest and principal payments.
Regardless of when a repayment occurs during the income year, interest will be for the full year.
The transitioning of both 7 and 25-year loans under Division 7A into the new regime. The earlier report had recommended grandfathering (preserving) 25-year loans under the existing arrangements.
Both existing 7 and 25-year loans will be subject to the new higher overdraft interest rate as from 1 July 2019.
Existing 7-year loans will keep their current outstanding term when transitioned into the new regime, but existing 25-year loans must be put on new 10 year complying loan arrangements prior to the lodgment day of the company tax return for the 2021 income year.
Both pre-4 December 1997 loans (with the benefit of a two-year grace period) and unpaid present entitlements (UPEs) arising on or after 16 December 2009 must be put on new complying ten-year loans. The proposal does not address pre-16 December 2009 UPEs (which appear quarantined under the proposed new regime).
The removal of the concept of distributable surplus such that there is no limit to the amount that may trigger a deemed dividend under Division 7A.
The extension of the review period for Division 7A to 14 years after the end of the income year in which the loan, payment, or debt forgiveness triggered, or would have triggered, a deemed dividend.
The earlier report’s recommendation for a once-and-for-all election to exclude loans from companies (including UPEs owing to companies) from the operation of Division 7A (the ‘business income election’) is not included in the proposed regime, despite the earlier report noting that the election to be excluded from Division 7A should accompany the new loan model.
The Consultation Paper takes a “pick and choose” approach from the earlier report, removing the ability to choose to be excluded from the Division 7A regime, while introducing many of the penal aspects.
There are several further proposed amendments relating to:
non-resident private companies;
new safe harbour measures for the use of assets by a corporate taxpayer;
amendments to the timing rules in section 109CA(2);
amendments to the interaction between debt forgiveness and loans;
amendments to section 109M that addresses loans made in the ordinary course of business;
removing some of the restrictions around the interposition of entities in 109T to extend the operation of this provision; and
the integration of Division 7A and fringe benefits tax and deductibility of payments.
Submissions are due by 21 November 2018.
While we welcome further consultation on reform of Division 7A, we query whether in the current political environment the proposed start date of 1 July 2019 is realistic.
Sladen Legal’s Tax team has extensive experience on all aspects of Division 7A and will prepare a detailed article once we have reviewed the Consultation Paper in depth.
For more information on what the proposed changes may mean for you please contact: