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    division 7A proposed amendments - consultation paper released by treasury

    In brief:    Treasury this week released a Consultation Paper on the Division 7A amendments proposed to commence on 1 July 2019. There are some significant changes from what has previously been mooted, with some of the main points now proposed including:

    •   a single 10 year model for complying loans, with equal annual principal repayments and interest at a Reserve Bank published indicator rate for small business overdrafts (currently 10.3%, compared to the current Division 7A rate of 5.2%)
    •   except for the initial year of the advance, loan interest will be calculated for a full year regardless of when any repayment is made during the year
    •   25 year loans existing on 30 June 2019 must adopt the new interest rate immediately, but the new 10 year loan rules will not apply until 30 June 2021
    •   7 year loans existing on 30 June 2019 will retain their existing outstanding term, but must otherwise comply with the new loan model
    •   loans made before 4/12/97 must adopt the 10 year repayment model from 30 June 2021
    •   the concept of ‘distributable surplus’ will be removed, so that Division 7A will always apply to the whole value of any loan or other benefit extracted from a private company
    •   all outstanding UPEs after 15/12/09 will effectively be subject to the 10 year repayment model from 1 July 2019, although no decision has yet been made to also bring in UPEs from before 16/12/09.

    More:    The Consultation Paper also outlines some further amendments that the Government proposes. Perhaps the most significant is the proposal of a 14 year review period during which assessments can be amended in respect of Division 7A matters. In addition, a self-correction mechanism is proposed for taxpayers to rectify inadvertent breaches of Division 7A. Taxpayers will be permitted to self-assess their eligibility for this relief, under which they will be obligated to convert any relevant benefit into a complying loan agreement. Affected taxpayers will also need to make catch-up payments of both principal and interest (on a compound basis) that would have been required, had they properly complied with Division 7A in the first place.

    Other proposed amendments include a safe harbour formula that may be adopted in the case of an asset (other than a motor vehicle) provided by a company for use by a shareholder or their associate, confinement of the exclusion for loans made in the ordinary course of an entity’s business to loans made in the ordinary course of a moneylending business, and a ‘but for’ test for the application of s 109T to loans, payments or other benefits provided to a taxpayer indirectly from a private company. (Targeted amendments to the Division 7A integrity rules: Consultation Paper, October 2018)

    24 Oct 2018

    Topic: Income tax/Trusts

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