Targeted Division 7A Changes — Consultation

Treasury has released its Consultation Paper that outlines their view of the proposed Division 7A changes relating to private companies and trusts.

The Consultation Paper outlines proposed changes only; these changes seek further consultation prior to the draft legislative process and final release. The Consultation Paper has already been a source of uncertainty, attracting heavy criticism from the professional accounting and taxation bodies.

The Key Changes:

Start Date

The federal government has announced Monday, 1 July 2019 as the (delayed) start date for proposed Division 7A changes. The centerpiece is that any and all new loans from that date will be simplified to a 10 year complying loan agreement. The annual variable principal and interest will be charged at the notably higher Reserve Bank overdraft rate, not the Division 7A rate (i.e. as at September 2018 8.3% vs 5.2%).

The most significant change is an attempt to include pre-4 December 1997 loans within Division 7A. The Consultation Paper proposes to require pre-4 December 1997 loans to be repaid within 10 years. There is an estimated $16 Billion in pre-4 December 1997 loans within the Australian economy that Treasury wants to capture.

7 and 25 Year Loans

The proposed rule changes bring the current 25 year loans into the 10 year loan period. As at 1 July 2019, any existing 7 year loans will see out their existing 7 year terms but the interest rate will change in line with the Reserve Bank rate.

Loans that are secured and are currently repayable over a 25 year period will have until 30 June 2021 to convert to a 10 year loan and will be repayable within 10 years. New loans from 1 July 2019 are to be repaid within a 10 year period.

Unpaid Present Entitlements

From 1 July 2019, all post-16 December 2009 Unpaid Trust Distributions (known as Unpaid Present Entitlements or UPE's) owed to corporate beneficiaries will be deemed to be dividends unless they are put on a 10 year Division 7A complying loan footing.

Although there is no direct statement concerning pre-16 December 2009 UPE's, there is a Consultation Question asking whether the measure should be extended to pre-16 December 2009 UPE's. Whilst we struggle to think of any of the Professional Accounting and Taxation Bodies writing back to Treasury to argue that the measures should be extended to pre-16 December 2009 UPE's, it is clearly on Treasury's radar.

We await the 2 April 2019 Budget to see whether the proposals will be implemented prior to what is likely to be a May 2019 Federal Election.

To discuss the implications of the Consultation Paper's proposed changes for your group or for further information contact Alanta Butera, Oxygen Private Clients, 03 9977 2600.

#taxation #accounting #finance #divison7A #OxygenPrivateClients

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DISCLAIMER: The information contained in or referred to in this Blog Post is general in nature, subject to change, and should not be taken as advice for your individual or your group's circumstances. It is for information only and does not take into account any person or group's specific circumstances, objectives, financial situation or requirements. It does not constitute taxation, legal or financial advice. Oxygen Private Clients recommends you seek specific professional advice before making any decision or taking any action.

Alanta Butera
Alanta Butera 10 December 2018 BACK