Our submissions to proposed Division 7A amendments

Given the significant impact of the proposed changes to Division 7A, we have prepared our own submission on the Consultation Paper.

2018-11-30

Division 7A applies to private business and investment groups who use companies as part of their structures. The proposals in Treasury's consultation paper on Targeted Amendments to the Division 7A Integrity Rules have the potential to significantly impact on such groups.

Our submission on the Consultation Paper includes the following key points:

  • We have concerns with the proposed 10 year Division 7A loan model in relation to:

    • the proposed requirement for equal annual repayments of principal – in our view the Amortisation Model proposed by the Board of Taxation was preferable and provided more flexibility in terms of cash flow management

    • the proposed requirement for interest to be paid for a full year on the opening loan balance. We believe that this is both unduly punitive and non-commercial and provides a disincentive for early repayment of Division 7A loans

  • The proposal to transition existing complying 25 year Division 7A loans into 10 year loans is retrospective and unfairly penalises taxpayers who entered into those loans based on existing law. Some such loans will be between parties who are technically associates but, for all practical purposes, are commercially independent.

  • We strongly believe that the distributable income concept be retained. The proposal to discard the distributable surplus concept, which currently serves as a cap on dividends that can be deemed under Division 7A, will produce outcomes that are completely unfair and contrary to good policy. If introduced, this proposal would enable the deeming of dividends well in excess of a private company’s ability to pay a dividend. For example, private company loans to shareholders funded by external debt in the company (and not profits) could be deemed to be dividends.

  • We have submitted that pre-1997 loans should be grandfathered, or if these loans are not grandfathered, we have proposed that such loans only be brought within Division 7A where:

    • those loans are directly made by private companies. We believe that this is essential to avoid the minefield of complexities and challenges that would otherwise arise for taxpayer groups; and

    • those loans would have been subject to Division 7A had those loans not originally been grandfathered under the original provisions of Division 7A.

  • We have strongly submitted that pre-19 December 2009 UPEs be grandfathered, consistent with what is understood to be proposed in the Consultation Paper.

  • We have argued for the retention of the 4 year statutory amendment period, rather than the proposed extension to 14 years for Division 7A issues

For more information on the proposed changes or our submission, please contact your ShineWing Australia representative.

Ian Kearney
Partner, Tax
ShineWing Australia
+61 3 8635 1914
ikearney@shinewing.com.au

Rosalind Myint
Partner, Tax
ShineWing Australia
T +61 2 8059 6800
E rmyint@shinewing.com.au