On 25 March 2014 the Board of Taxation released its second discussion paper on the post-implementation review of Division 7A of Part III of the Income Tax Assessment Act 1936.
In the 2017 Federal Budget, the Government announced that amendments would be made to the Division 7A incorporating the amendments from the second discussion paper and the earlier paper from December 2012.
On 22 October 2018, Treasury released a Consultation Paper to seek stakeholders views on the proposed amendments made to the Division 7A that are due to apply from 1 July 2019.
The 9 main points of the new regime outlined in the Consultation Paper:
- New Division 7A loans will now be single 10-year loans with principal and interest paid each year.
- Interest rate will increase from current ATO benchmark rates, and will be the “Small business; Variable; Other; Overdraft – Indicator Lending rate most recently published by the Reserve Bank of Australia prior to the start of each income year” – resulting in substantially higher interest and repayments over the term of the loan.
- 25 year loans will not be grandfathered (preserved), with transitional rules allowing a two year timeframe to transfer the loan to a new 10 year loan. Failure to transfer will result in a deemed dividend.
- The concept of distributable surplus is being removed – meaning there will be no limit to the amount that may trigger a deemed dividend under Division 7A.
- The amendment period for Division 7A loans, payment, or debt forgiveness will extend to 14 years – up from 5 years.
- Existing Division 7A loans will transition to new rules, however loan terms will not be extended.
- Regardless of when a repayment occurs, interest will be charged for the entire income year.
- Both pre-4 December 1997 loans and unpaid present entitlements (UPEs) arising on or after 16 December 2009 must be put on new complying ten-year loans.
- Self-correction mechanism will apply to rectify Division 7A breaches – make good catch up payments will be allowed.
It is not yet clear if pre-16 December 2009 UPEs will be included in the new Division 7A rules.
If you have any further queries on the information above, contact your Ledge Finance Executive directly or contact us here.