Targeted amendments to Division 7A – Treasury consultation paper

Today, Treasury has released a consultation paper relating to the proposed amendments to the Div 7A rules that are due to apply from 1 July 2019.

 

The release of this paper is significant as it is the first detail provided by the Government on how the new proposed rules are intended to apply.

Prior to today’s release, the Board of Taxation’s report outlining recommendations to Government (finalised in 2014) was all we had available as a guide on how the new rules may be applied. Treasury has made substantial changes from those original recommendations.

The notable points that may affect your group are:

  • New Div 7A loans will be straight line 10 year – principal and interest paid each year (previously 7 years)
  • Interest rate will increase from current ATO benchmark rates, and will be the “Small business; Variable; Other; Overdraft – Indicator Lending rate most recently published by the Reserve Bank of Australia prior to the start of each income year”. This will result in substantially higher interest and repayments over the term of the loan
  • Existing Div 7A loans will transition to new rules, however loan terms will not be extended
  • 25 year loans WILL NOT be grandfathered. Transitional rules will allow for 2 years to transfer the loan to a new 10 year loan. Failure to convert these loans will result in a deemed dividend
  • The concept of “distributable surplus” is being removed – this will result in previously exempt loans and payments being captured by the Div 7A rules and triggering tax that previously would not be payable
  • Self-correction mechanism will apply to rectify Div 7A breaches – make good catch up payments will be allowed
  • Amendment period relating to Div 7A loans, payments and forgiveness will extend to 14 years as an integrity measure (up from 5 year amendment period)
  • Post December 2009 Unpaid Present Entitlements (UPE’s) will be captured by the new Div 7A rules (this includes Sub Trust arrangements set up under the Practice Statement 2010/4)
  • IMPORTANTLY, IT IS STILL NOT YET CLEAR whether Pre December 2009 Unpaid Present Entitlements (UPE’s) will be included in the new rules. The consultation paper is specifically asking feedback asking “Should UPEs arising prior to 16 December 2009 be brought within Division 7A?”
    The proposed changes will affect a large number of taxpayers and in some instances will require proactive tax planning to ensure tax effective structures are maintained during the transition.

We will continue to keep you informed of the changes as further updates come to hand.