More Changes to Deemed Dividend Rules? Here We Go Again!
As if running your own business is not complicated enough, the funding of associated ventures and extraction of funds from the family business is fraught with damage due to the application of deemed dividend rules known as Division 7A.
In its infancy Division 7A was enacted to catch the straightforward position of shareholders (or associates) taking loans from the family company rather than paying a dividend, thus capping the tax paid on the funds at the respective company rate (currently 30%). However, over the years various strategies have been developed to circumvent the rules with a subsequent patchwork of guidelines and legislative changes leaving a highly complex set of rules. The rules now catch commercial transactions in circumstances that were not originally intended and are actually impeding genuine business growth and funding.
As a result, a further review is underway with a report due by the end of October 2014 following the Board of Taxation March 2014 discussion paper. Whilst a number of issues were considered in the paper, the options outlined in the paper are seeking simplicity and certainty for advisers and businesses.
The recommendations to emerge in October may or may not be enacted and may or may not reflect the ideas of the discussion paper, however, based on the paper the most probable position is that the various loan types (7 and 25 years principle and interest, 10 years interest only) together with the complexity around unpaid present entitlements (UPE) will be resolved. The likelihood is that a simplified 10 year loan will be available with a streamlined repayment schedule, known interest rate and various check in points.
So what does this mean for existing or upcoming positions? Consideration should be given to adopting a 25 year loan position where possible on the basis that these loans would be grandfathered, taking into account any associated costs.
Dealing with loans are only part of the issue as a significant amount of complexity relates to which UPE’s are caught and which remain outside of Division 7A. The discussion paper indicates a preference for legislative change to include all UPE’s and therefore businesses should consider what the impact would be if UPE’s previously outside the scope of Division 7A would need to be incorporated and dealt with.
Linked to the UPE issue is a potential option for loans to certain trusts being excluded from the Division 7A rules, however, this could mean trading simplicity for access to the CGT discounts on all assets except goodwill. Such a course of action would require serious consideration and an analysis of the existing assets in the trust and any transitional and grandfathering rules.
The review recommendations will need to be considered in detail on release, however, businesses should start to plan for change.
Should you have any queries in relation to the above please contact your relevant ESV Engagement Partner on 9283 1666.
Article by David Prichard