Whilst the details of the proposed changes have not been announced, the government has indicated that the proposed changes are based on recommendations that the Board of Taxation submitted in November 2014.
The changes will come into effect from 1 July 2018 and will impact both pre-existing and new loans.
The new rules will allow taxpayers to self-correct arrangements that would otherwise trigger deemed dividends under Division 7A without penalty.
They will also introduce safe harbour rules for calculating the amount required to be charged to shareholders for the use of assets held by companies, with the aim of reducing compliance costs and uncertainties for taxpayers.
All shareholder loan arrangements will be placed on 10-year loan terms. Although the government has provided few details, the Board recommended that:
- No formal written agreement would be required;
- The interest rate would be fixed over the term of the loan, however, the applicable interest rate is expected to be higher than the current benchmark rate;
- Rather than annual minimum repayments, minimum balance targets would need to be met at prescribed points during the loan term.
The Board also recommended that all existing company loans and unpaid trust entitlements, regardless of when they first arose, would transition to these terms. Interestingly, the start date for the new loan arrangements would coincide with the expiry of the very first ‘ATO model’ investment agreements that first applied to unpaid distributions in 2011.
We note that the announcement made no reference to the Board’s recommendation that business trusts be able to elect to retain the current treatment in return for foregoing access to capital gains tax discounts.
The government also announced that a number of technical amendments would be made with the purpose of improving the overall operation of Division 7A.
The rules in Division 7A impose a significant compliance cost for many small to medium businesses. Pitcher Partners has been actively involved in advocating for the reduction in complexity of Division 7A over a number of years.
It is pleasing to see that the government has decided to adopt the Board’s recommendations.
The government has indicated that it will consult with stakeholders in developing the proposed changes. We will continue to engage with the government to ensure that these changes achieve their stated aim of reducing complexity and compliance costs.