Changes to Div 7A are definitely on the horizon
There has been much talk on the consultation paper released by Treasury, on the proposed changes to the Division 7A rules contained in the ITAA 1936. Please note, it is in consultation phase and many of the finer details will be a ‘wait and see’ game. If or more likely, when in enacted, the proposed changes are to take effect from 1 July 2019. That is just around the corner, especially when there is a bunch of transitional provisions proposed as well. As a summary, the proposed changes are as follows:
- Simplification of the Div 7A loan rules: What is proposed here is that current complex rules and loan types will be replaced with a ‘single loan’ model. This ‘single loan’ model will have a set of criteria that will need to be followed. For example, the loan will have a maximum term of 10 years, there will be no requirement for a formal loan agreement (however, the loan will still need to be evidenced by a particular timeframe), and minimum repayments must be both principal and interest.
- Unpaid Present Entitlements: It is proposed that a consistent approach will be taken to the treatment of UPE’s. What this means is that the UPE will be required to be repaid to the company over time as a complying loan or taxed as a deemed dividend from the company to the trust.
- Introduction of a ‘self-correction mechanism’ for inadvertent errors: Based on specific qualifications and criteria, taxpayers will be able to self-assess their eligibility for relief against the tax treatment of a deemed dividend due to an honest mistake or inadvertent omission. As an outcome, the taxpayer must then convert the amount to a complying loan agreement based on the same terms that would have applied had the loan agreement been entered into when it should have been.
- Safe Harbour rules for the use of assets: Based on current rules, it can be sometimes difficult to determine the arm’s length value for the use of an asset by a shareholder that is owned by a company. It is proposed that a ‘safe harbour’ based on a formula and accompanying rules be provided so as to provide clarity and direction. Taxpayers will continue to be able to use their own calculation of the arm's length value, instead of the legislative formula. The ‘safe harbour’ will apply for the exclusive use of all assets excluding motor vehicles (as the market value for rental of a motor vehicle is readily ascertainable).
- Other technical amendments: The proposed changes also looks at application of s109BC to foreign resident companies, the concept of removing ‘distributable surplus’ as a benchmark to the limit on the payment of deemed dividends, tightening on debt forgiveness and interposed entity loans.
Therefore, watch this space whilst Treasury finalises consultation. We will keep you posted.
At NowInfinity, we constantly review and keep our documents up to date, based not only on legislative changes but also on ‘best practice’ principles. We are already across these proposed Div 7A changes and are on the pulse to introduce any amendments if and when required. That you can guarantee.
We have your back!!
The NowInfinity Team