When a related party borrows from a company or other entity, this may be required to be treated as a Division 7A loan.
Discussion about reforms to Division 7A has been bouncing back and forth between Treasury and the ATO for many years — since the end of 2012 in fact, giving the impression they may have been stonewalling any moves on Division 7A.
But a definite crack appeared in that wall with the May 2016 Federal Budget. It was announced that “targeted amendments” were planned for two years hence from that date — in other words, 1 July 2018.
Well, as we know this time has come and gone. But just prior to that deadline (in May 2018, that is, the last budget), the timing of Div 7A reforms was pushed out once again, this time to July 2019.
But now, a paper has been released which spells out the intended Div 7A reforms, noting that the start date of 1 July 2019 remains unchanged.
The discussion paper was released on October 22, and is titled “Targeted amendments to the Division 7A integrity rules” (download it here).
The biggest change is that the current seven-year and 25-year loan models will be replaced by a single 10-year loan model.
The annual benchmark interest rate 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. For the year starting 1 July 2018 this rate is 8.3%, so is a massive increase from the 5.2% of the current benchmark interest rate that currently applies.
There will be no requirement for a formal written loan agreement, however written or electronic evidence showing that the loan was entered into must exist by the lodgement day of the private company’s income tax return.
Under the proposed changes, qualifying taxpayers will also be permitted to self-assess their eligibility for relief from the consequences of Division 7A.
To qualify for self-correction, the taxpayer will need to meet eligibility criteria in relation to the benefit that gave rise to the breach.
The other major change is to the concept of distributable surplus – actually it is the total removal of the concept of distributable surplus.
And, after eight years of arguing with the Commissioner on whether unpaid present entitlements (UPEs) fall within Division 7A, the argument is over. The paper states that the law should be changed to specifically say that a UPE will be treated just like a loan.