As you are aware, the Treasury released its Consultation Paper in
October 2018 containing its recommendations for a raft of amendments to the
Division 7A provisions. These were in addition to the Board of Taxation’s
recommendations released back in 2015. The proposed start date for the
amendments was last set as 1 July 2020.
On 30 June 2020, Assistant Treasurer, Michael Sukkar announced that the start date will be revised to the date of royal assent of the enabling legislation. In announcing the revised start date, Mr. Sukkar said it was made “as a result of the reprioritisation of government resources and the shortened parliamentary sitting period in 2020 due to the COVID-19 crisis”.
There are twelve sitting days in the Parliament in August 2020, three sitting days in September 2020 with the scheduled date for the 2020/2021 Federal Budget on 6 October 2020. Accordingly, there is a strong likelihood that the enabling legislation will be introduced and passed in the Parliament on 6 October 2020 or even before that during the August or September 2020 sittings.
Broadly, the following amendments have previously been proposed by Treasury and the Board:
- Private companies making loans on or after 1 July 2020 will need to have a maximum term of 10 years.
- Complying 25 year loans in existence as at 30 June 2021 will need to be converted to 10 year loans.
- Pre 4 December 1997 loans in existence as at 1 July 2021 will become subject to Division 7A.
- Unpaid present entitlements due to a private company that arose prior to 16 December 2009 will need to be placed on Division 7A complying loan agreements.
- The interest rate applicable to Division 7A loans will be the ‘Small Business; Variable, Other Overdraft Indicator’ lending rate.
There is now an urgency for clients seeking to avail themselves of planning opportunities for loans and UPEs prior to the Division 7A changes being legislated. While the proposed start date of the amendments has been delayed on a few occasions, we now have a more definite start date being the date of royal assent of the legislation. As outlined above, this could occur as early as August/September 2020.
MKT has previously raised the need to review the following types of loans and UPEs in light of the proposed changes:
- Pre 4 December 1997 loans that may be statute barred.
- Post 3 December 1997 loans with historical Division 7A breaches.
- Loans with no distributable surplus.
- Pre 2009 UPEs inadvertently recorded as loans in financial statements.
- Pre 2009 UPEs where the trust has lost its ability to repay the UPE.