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Division 7A forms part of the Income Tax Assessment Act of 1936, with an intention to prevent company profits or assets being provided to shareholders or their associates while receiving the company concessional tax rate, opposed to their marginal tax rate. Essentially, it’s an anti-avoidance measure to stop share holders and their associates from utilising company assets for their personal benefit.
Only a few years ago, the Government proposed changes to the Division 7A regime. While not yet legislated, Australian tax experts believe it’s inevitable that they will be, and it’s simply a question of what changes and variations will be approved and when.
Want to know more about the proposed changes to Division 7A and explore restructuring solutions that could help you?
Read more from the Gold Coast Accountant team at Crest Accountants to find out.
Outlining the proposals
On the 22nd of October 2018, the Federal Treasury released its Consultation Paper on Division 7A – seeking to address a number of proposed amendments.
The main proposal is the “10 year loan model” for all loans made by private companies. Both the existing 7 and 25 year loan options will cease and all existing loans transition to the new model.
What’s the reasoning behind the proposed 10 year loan model?
- To create a simpler loan model and to relive some of the administrative burden on taxpayers
- To better align with calculations for the repayment of principal and interest loans in commercial transactions.
- To transition s108 loans (loans that pre-date the establishment of Division 7A in 1997) to be subject to Division 7A, under the 10 year loan model.
In conjunction with the above, other changes have been proposed.
These centre on:
- Forgiving a loan – loans provided to a shareholder or associate in a year in which the company had no Distributable Surplus are to (eventually) be taxed in the hands of the shareholder or associate who received the economic benefit
- Clarify how non-resident private companies interact with the Division 7A rules
- Removing the concept of Distributable Surplus
- Unpaid Present Entitlements to private trusts to be formally caught under the Division 7A umbrella and treated as either loans or deemed dividends
- Self-correction of errors mechanism to allow taxpayers to rectify breaches
- Extending the period of review to 14 years after the end of the income year in which the Division 7A transaction was made
- Detail safe harbour rules for the private use of company assets
- Limit the exception to loans made in the ordinary course of business
- Clarify the interaction between the Fringe Benefits Tax regime and the Division 7A rules
For simplified understanding of the other proposed changes and what it may mean for you, talk to your Gold Coast Accountant.
Setting the wheels in motion
The Australian Government is being urged to set the wheels in motion regarding the proposed changes to Division 7A. After all, it has been close to 5 years since these proposals were first announced.
The Institute of Public Accountants General Manager of Technical Policy, Tony Greco, suggested the “…need to go back to the table and find a way forward that appeases all parties, and there is a sensible solution in part with what the Board of Taxation has provided.”
Chartered Accountants Australia and New Zealand (CA ANZ) senior tax advocate Susan Franks said similar, “advising clients about how these proposed changes will impact them is currently next to impossible.”
Rest assured that when these changes pass – we’ll work through them with you, together.
Your trusted Gold Coast tax accountant team encourage you to stay informed and seek clarity from our industry tax experts.
Crest Accountants provide tax clarity
In the instance where there’s a discretionary operating trust which pays distributions to a private company for tax purposes but doesn’t physically transfer the cash – a Division 7A loan exists.
We have a restructuring solution for this which doesn’t produce duty or Capital Gains Tax (CGT) liabilities.
Need help understanding your tax obligations?
Contact Crest Accountants today and find out how a dedicated and experienced Gold Coast Accountant will help you.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice.
