Proposed Division 7A Loan changes

The Department of Treasury recently released a consultation paper proposing changes to the treatment of Division 7A Loans.

Division 7A is an anti-avoidance measure designed to stop private companies from distributing tax-free profits and assets to shareholders or their associates. It applies to loans, advances, payments and other credits made by companies to their shareholders or associates.

Under Division 7A, these payments are categorised as unfranked dividends and treated as assessable income unless they fall within specified exclusions. Where the provisions under Division 7A are satisfied, the repayments are able to be paid as a franked dividend and paid back over seven years with accrued interest at a benchmark rate.

Some of the changes the Treasury has recommended include introducing a standard 10-year loan, reviewing the benchmark rate, back-dating compliance on loans prior to 1997, and introducing a new safe harbour rule on provision of assets.

These proposed changes are not yet law, as they require parliament to pass legislative amendments and there have been multiple announcements in previous years of an intention to change the law. However, the recent intention comes from the Board of Taxation – therefore, there’s a strong possibility of these new recommendations receiving bi-partisan support.

Should the Division 7A Loan amendments be approved, changes could come into effect from as early as 1 July 2019. Thankfully AMD is here to help.

AMD can review your Division 7A situation to help put strategies in place should the amendments be approved, thereby helping you navigate any issues in the short term. Feel free to contact us to find out how we can help your business.