Treasury has released a consultation paper entitled Targeted amendments to the Division 7A integrity rules, outlining the Government’s proposed reforms to Division 7A.
Division 7A is a tax integrity measure designed to ensure that certain taxpayers (i.e., shareholders of private companies and their associates) cannot directly access funds taxed at the applicable company tax rate.
Specifically, where a company makes a payment or otherwise lends to or provides assets for the private use of shareholders and/ or their associates, Division 7A will generally treat such amounts as unfranked dividends, which are taxable in the hands of the recipient.
These include (amongst other things):
The proposed amendments are intended to apply from 1 July 2019. Arguably, if enacted, these changes will be the most significant tax reforms to impact business and investment clients over the next two years.
In particular, the proposed reforms relating to the new ‘simplified’ Division 7A loan rules will require both taxpayers and the practitioners who advise them to adjust their traditional approach to such loan arrangements and internal cash flow funding.
New 10-year Division 7A loans
Currently, the rules allow Division 7A amounts to be converted into one of two types of loans, being either:
Following the implementation of the proposed amendments as outlined in the consultation paper, a new single loan model will apply, with the following features:
Transitional rules for existing Division 7A loans
Transitional rules are also proposed to allow taxpayers that have existing seven or 25-year loans to transition to the new 10-year loan model, as follows:
On 30 June 2021, it is proposed the outstanding value of any 25-year loans will give rise to a deemed dividend unless a complying 10-year loan agreement is put in place prior to the lodgement day of the relevant 2021 company tax return.
Other significant Div. 7A reforms
Other significant reforms include:
Division 7A and UPEs
A UPE is created where a trust makes a private company presently entitled to a share of its income for a year, but does not pay that entitlement out in full.
Since 16 December 2009, the Commissioner has taken the view that UPEs owing to companies are generally within the scope of Division 7A, unless the funds representing the UPE are held for the sole benefit of the private company. Refer to TR 2010/3.
Under the current treatment, this means that UPEs owing to company beneficiaries (e.g., ‘bucket’ companies) either need to be:
Following the introduction of the proposed amendments, a UPE will be a deemed dividend from the relevant corporate beneficiary to the trust unless:
by the lodgement day of the company’s income tax return for the relevant income year.
The intention of this change is for UPEs to be treated consistently with other payments made by private companies.
Transitional rules for existing UPEs
The application of the proposed Division 7A treatment of UPEs will depend on when the UPE first arose, as follows:
Any amounts outstanding will result in a deemed dividend.
– paid to the private company; or
– put on complying loan terms under the new 10-year loan model prior to the private company’s lodgement day.
Otherwise, they will be deemed to be a dividend in the year the UPE arose.
Ref: Treasury consultation paper: Targeted amendments to the Division 7A integrity rules