The impending changes to Division 7A
by Michael Carruthers, on 02/11/18 13:39
Treasury recently released a consultation paper that if enacted, will significantly change the way Division 7A operates.
Following on from announcements made in the 2017-18 and 2018-19 Federal Budgets, Treasury has released a consultation paper which explains how many of the proposed changes to Division 7A are likely to apply. It is important to note that this is merely a consultation paper, no legislation has been passed or released at this stage and the final version of the rules may end up looking quite different.
The key proposals due to commence from 1 July 2019 are summarised below:
- While the current rules allow Division 7A loans to be placed under a 7 year or 25 year loan agreement, the new rules would only allow provide for a maximum 10 year loan agreement. Annual repayments of principal and interest would be required to prevent a deemed dividend from arising.
- Transitional rules would be introduced to ensure that all existing Division 7A loans are brought into the 10 year loan model. 7 year loans would retain their existing outstanding term. Existing 25 year loans would be largely exempt from the new rules until 30 June 2021.
- Loans made before 4 December 1997 that have not been forgiven (or deemed to have been forgiven) will be refreshed and brought within the scope of Division 7A. They will be treated as financial accommodation as at 30 June 2021 and will need to be repaid or placed under a complying loan agreement by the company’s lodgement day for the 2021 tax return to avoid a deemed dividend.
- The concept of distributable surplus will be completely removed, which means that the entire value of the loan, payment or forgiven debt will be an assessable deemed dividend regardless of the financial position of the company.
- Unpaid present entitlements (UPEs) will trigger a deemed dividend unless they are paid out or placed under a complying loan agreement by the lodgement day of the company’s tax return. Existing UPEs that arose between 16 December 2009 and 30 June 2019 will be brought within the scope of these new rules as well. Treasury is still considering whether UPEs that arose before 16 December 2009 should be brought within the scope of Division 7A.
- A self-correction mechanism will be introduced which will enable taxpayers to fix Division 7A problems without having to ask for the Commissioner’s discretion to disregard a deemed dividend. A number of conditions would need to be met in order to be able to take advantage of this (e.g., appropriate steps must be taken to fix the problem within 6 months of identifying the error).
- The amendment period rules for Division 7A issues will be extended to cover 14 years after the end of the income year in which the loan, payment or debt forgiveness occurred.
- Safe harbour mechanisms will be introduced in relation to the use of company assets where the parties are trying to show that the shareholder has paid an arm’s length amount for the use of the asset.
A number of other changes are being proposed with the aim of clarifying issues which currently cause confusion as well as addressing some integrity concerns that have been identified.
Regardless of how this process evolves over the coming months it seems pretty clear that some very significant changes to Division 7A are on the way. Given the proposed start date for most of the changes is 1 July 2019 this won’t leave much time for practitioners and clients to understand how the new rules apply, especially as it appears that the changes may impact on existing arrangements.
Watch this space. We will keep you up to date as changes occur.
- Treasury - Targeted amendments to Division 7A