Post-Election Division 7A Landscape

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As published in our Summer 2018 QTB, the Government released a consultation paper in October 2018 on the proposed amendments to Division 7A of the Income Tax Assessment Act 1936. Most of the changes were proposed to be implemented from 1 July 2019. In the 2018/19 Federal Budget released in April 2019, the Government announced that these changes will be delayed to 1 July 2020.

While further submissions on the consultation papers are no longer available, the Government announced in its budget paper that delaying the start date by another 12 months will allow further time to consult with stakeholders on these issues and to refine the Government’s implementation approach, including to ensure appropriate transitional arrangements so taxpayers are not unfairly prejudiced.

With the re-election of the Coalition into Government, it will be interesting to see whether any of the previous changes announced will be further modified. The key changes, as they currently stand, are as follows:

  1. Private companies making loans on or after 1 July 2020 will need to have a maximum term of 10 years.
  2. Complying 25 year loans in existence as at 30 June 2021 will need to be converted to 10 year loans.
  3. Pre 4 December 1997 loans in existence as at 1 July 2021 will become subject to Division 7A.
  4. Unpaid present entitlements due to a private company that arose prior to 16 December 2009 will need to be placed on complying loan agreements effective 1 July 2020.
  5. The interest rate applicable to Division 7A loans will be the Small Business; Variable, Other Overdraft Indicator lending rate from 1 July 2020. This rate is currently at 8.32% compared to the Division 7A benchmark rate currently at 5.2%.

We recommend undertaking a review of the existing Division 7A arrangements in place to commence planning for potential consequences arising from the new measures. In particular, if you have clients with pre 4 December 1997 loans in existence, we recommend considering whether there is an argument that the loans are ‘statute barred’ and now outside the scope for amendment of prior year tax returns.

Please contact Sean Pearce or Gaurav Chitnis if you would like to discuss how these proposed changes may impact your clients and whether there are opportunities you should be presenting to those clients to limit its impact.

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