Federal Budget: Division 7A changes moving forward

The government recently made an announcement which they intend to make some changes to the provision of Division 7A Loans. Division 7A is a Tax Law provision that prevents private companies from making loans to associates from a company’s retained profits without any tax implications. The loans that will be covered under this legislation would now include all Pre December 2009-loans, current Div7a loans and also the possible inclusion of Pre December 1995-loans.

The current government would like to implement the recommendations from the Board of Taxation report prepared in November 2014 as the basis for the changes, however, there has been no clear guidelines of the recommendations that will be implemented. The timeline for the changes has been announced however, the changes were originally coming into effect from 1 July 2018. The 2018 budget has now pushed the start date to the 1 July 2019. Which will give a bit more time to look at some options in how to deal with the existing loans on business balance sheets.

The main issues addressed in the Board of Taxation Report concerned how to make the rules easier to understand and apply to the loans as well as providing a more flexible approach to repayments rather than as they currently stand. As part of these recommendations and simplification it was proposed the loans covered under this legislation would be all Pre December 2009 loans, current Div7a loans and also the possible inclusion of Pre December 1995 loans.

The main change concerning the term of the loans is the proposal to transition all loan arrangements to a 10-year term with a grandfathering of existing 25 year loans. In addition, rather than requiring annual minimum repayments, minimum balance targets would need to be met at various points in the life of the loan (3, 5 and 8 years). Which can make managing these loans a little easier if minimum repayments have not been met.

The most significant recommendation however revolves around the treatment of certain company loans and unpaid trust entitlements which currently fall outside the scope of Division 7A. The recommendation is for these items to be brought within the scope of Division 7A.

Given the above, taxpayers with these loans and unpaid present entitlements (UPE’s) currently outside Division 7A as well as those on a shorter term agreement may wish to start considering how they will fund the consequential interest and principal amounts. This could include transitioning to 25 year loan agreements where possible.

Should you have any questions in relation to the above, or Division 7A rules in general, please contact us at Lawrence Group.

– Adriano Di Lazzaro, Accountant & Partner

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