03 Dec Division 7A and Proposed Changes
On October 22nd, 2018, the Australian Government released a document proposing the implementation and amendments to improve the integrity and operation of Division 7A. This was in response to the Government’s investigation for improvements to the Income Tax Assessment Act 1936.
Division 7A Background
If you’re a business owner for a private company, be aware that Division 7A was implemented to sanction people from doling out money through other ways that aren’t a salary or dividend. Division 7A is an area that the Australian Taxation Office monitor very closely, due to tax exploitation made by companies to their shareholders. Division 7A is defined as an integrity rule which is intended to prevent profits or assets being provided to shareholders or their associates, trusts or interposed entities tax-free.
Transactions under Division 7A include:
- Amounts paid to a shareholder or associate including transfers of property for less than the market value
- The lending of money that has no written agreement that follows prescribed legislative requirements (unless it is paid in full by lodgement day)
- Debts that are owed by shareholders or associates in which the private company forgives
Changes to Division 7A
The list of proposed amendments made to the Division 7A Act which will be applied from the 1st July 2019 are summarised and listed below:
- The current seven-year and twenty-five-year loan models will be replaced with a 10-year loan model
- The annual benchmark interest rate will be based off the Reserve Bank of Australia’s overdraft rate for ‘Small business, variable, other, overdraft indicator”
- The requirement of a written loan agreement will be replaced with electronic device evidence proving that a loan was entered into by lodgement day for tax returns
- The concept of distributable surplus is removed
- Unpaid present entitlements (UPE) will be treated consistently with other payments as a complying loan
- Existing 7-year unsecured loans will keep their current outstanding term upon the new Division 7A Act in 2019
- Existing 25-year secured loans will need to speak with their private company about complying with the 10-year model
- A self-correction system will be put into place allowing taxpayers to rectify any breaches within the Act
- Implementation of a safe harbour mechanism for the delivery of certain assets by a private company. This ensures both parties involved in an ‘Arm’s length’ deal have reduced compliance burdens
To view the full report of the ‘Targeted Amendments to the Division 7A Integrity Rules’ click here. We highly recommend seeking financial advice from a professional if you’re looking for more information regarding these new changes. Feel free to contact our friendly team or fill out an online form today for all your business, tax and financial advice enquiries!