A fundamental change to Division 7A (stuck in a review for another year!?!?)

You can’t just say this and do nothing…

The Government has FINALLY released the very long awaited post implementation review into Division 7A . This review started in 2012 and was to be the place where the Government, through the Board of Taxation, consider making Division 7A less painful. Specifically, in 2013 the Board were told to consider (aka solve) the Commissioner’s change of position in December 2009 in relation to Unpaid Present Entitlements to corporate beneficiaries.

But unbelievably, in the press release where the Assistant Treasurer released this review, he 100% chickened out and said “They will be carefully considered alongside the submissions we have received from all parts of the community in response to Re:Think, the tax discussion paper.”

So the response the Government makes to this long awaited review, which has great recommendations that will really help businesses stuck with Division 7A issues, is to hand the review recommendations to another review.

A review of the review… Embarrassing! And this from a Government that complained about the way the previous government handled reviews.

But what does the Board of Taxation recommend… Changes that would fundamentally change Division 7A. In summary:

For general Division 7A loans

  • There should be no requirement for a formal written agreement between the parties, just written or electronic evidence showing that a loan was entered into must exist by lodgement day.
  • The statutory interest rate would be set at the start of the loan and fixed over the term of the loan.
  • The maximum loan term would be 10 years.
  • The prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows:
    • 75 per cent of the original loan by the end of year three;
    • 55 per cent of the original loan by the end of year five;
    • 25 per cent of the original loan by the end of year eight; and
    • 0 per cent of the original loan (that is, fully repaid) by the end of year 10.
  • Subject to meeting the maximum loan balances, there would be no specified annual principal repayments.
  • Interest would be able to be accrued annually but would have to be paid by the end of years three, five, eight and 10.
  • Basing the amount of any deemed dividend on the amount of the shortfall in the payment required.
  • Transitioning all pre existing Division 7A loans and pre 1997 loan to the new 10 year loans from the application date of the new provisions.
  • Enacting a self correction mechanism where certain errors are made.

In relation to Unpaid Present Entitlements to Corporate Beneficiaries…

  • Introducing a legislative amendment that allows trusts to make a once and for all election for loans from companies, including UPEs owing to companies to be excluded from the operation of Division 7A.
  • Making the election by completing a label in the trust’s tax return by the due date for lodging the return for the year of income in which it is made.
  • Ensuring that a trust that makes such an election forgoes the CGT discount on capital gains arising from assets other than goodwill and ’intangible assets inherently connected with the business carried on by the trustee’;

Yes these changes would be amazing and solve most, if not all of the problems with Division 7A. The Government has had this report since November 2014 and have only released it today (Friday afternoon before a long weekend) so they can dump it in another review.

Embarrassing (opps – I said that before).

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
This entry was posted in Income Tax, Tax Policy. Bookmark the permalink.

One Response to A fundamental change to Division 7A (stuck in a review for another year!?!?)

  1. Pingback: The shortest Budget summary ever… | Tax Rambling

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