18 April 2018
by David Prichard
- Related topics
The long-awaited Division 7A amendments have been released as a consultation paper with submissions closing on 21 November 2018. The proposals in the consultation paper do not exclusively follow the Board of Taxation review proposals and there still appears to be inconsistency around Unpaid Present Entitlements which appears to go against the concept of making the law simpler to apply.
The proposals include a new benchmark interest rate being the Small Business; Variable; Other; Overdraft – Indicator Lending rate published by the RBA which is approximately 3% higher than the existing rate.
The amendments are proposed to apply from 1 July 2019.
New loans are proposed to be 10 year loans with an amortisation of the principal on a straight line basis over the 10 year period. Interest will be charged on the opening balance of the loan for the full year.
Existing 7 and 25 year loans are proposed to have a transitional period broadly as follows:
- 7 years – those existing at 30 June 2019 must comply with the new repayment model and new benchmark interest rate but retain their existing outstanding term;
- 25 year – those existing loans at 30 June 2019 will be exempt from most of the changes until 30 June 2021 except the revised interest rate. New 10 year complying loan agreement must be entered into prior to the lodgement of the 2020-21 income tax return to avoid a deemed dividend with the first repayment being due in 2021-22 year.
- Pre 1997 loans – these loans will be brought into the Division 7A regime and will be taken to be financial accommodate from 30 June 2021.
Where a UPE remains unpaid at the lodgement date of a company’s return it will be a deemed dividend unless a complying loan agreement is put in place. Transitional arrangements are broadly as follows:
- All UPE’s arising on or after 16 December 2009 and on or before 30 June 2019 will need to be put on a complying loan agreement by 30 June 2020 with the first repayment being due in the 2019-20 income year to avoid being a deemed dividend.
- All UPE’s arising on or after 1 July 2019 will need to be paid or put on a complying loan agreement under the new 10 year rules prior to lodgement of the companies return.
Significantly and surprisingly, the consultation paper is seeking input as to whether pre 2009 UPE’s should be brought within the Division 7A regime.
The concept of a distributable surplus (akin to retained profits) will be removed to align with the Corporations Act concept that a dividend can be paid out of share capital as well as retained earnings. This change could significantly increase the scope of Division 7A and lead to deemed dividends when there are no retained profits.
These are only some of the changes and whilst they are still proposals at this stage, they are unlikely to be significantly changed. As such, taxpayers with Division 7A loans should examine how these changes are likely to impact their cashflows, investment strategies and structures. Should you have any questions in relation to the changes please contact your ESV engagement partner on 02 9283 1666.