Federal Budget: Division 7A Changes Resurface
As part of the 2016 Federal Budget the government made a simple announcement that it intends to make a number of “targeted” changes to the rules concerning Division 7A. Division 7A seeks to prevent private companies from making tax-free distributions of profits to shareholders.
The government are seeking to implement the recommendations from the Board of Taxation report prepared in November 2014 as the basis for the changes, however, no clarity has been provided about which of the recommendations will be implemented. The timeline for the changes has been announced however, with the changes coming into effect from 1 July 2018.
The main issues addressed in the Board of Taxation Report concerned the simplification of the rules together with providing a more flexible approach to repayments. As part of these recommendations and simplification it was proposed that the new rules impact both pre-existing and new loans.
The main change concerning the term of the loans is the proposal to transition all loan arrangements to a 10-year terms with a grandfathering of existing 25 year loans. In addition, rather than requiring annual minimum repayments, minimum balance targets would need to be met at various points (3, 5 and 8 years).
The most significant recommendation however revolves around the treatment of certain company loans and unpaid trust entitlements which currently fall outside the scope of Division 7A due to when they arose. The recommendation is for these items to be brought within the scope of Division 7A.
Given the above, taxpayers with these loans and UPE’s currently outside Division 7A as well as those on a shorter term agreement may wish to start considering how they will fund the consequential interest and principal amounts. This could include transitioning to 25 year loan agreements where possible.
The government has indicated that it will consult with stakeholders in developing the proposed changes.
Should you have any questions in relation to the above, or Division 7A rules in general, please contact your ESV engagement partner on 02 9283 1666.
Article by David Prichard