Division 7A - Proposed Changes​

On 22 October the Treasury released it's Consultation Paper on Division 7A.  The paper proposed a number of amendments as shown below.. 

 

Proposal

  • There will be one “10 year loan model” for all loans made by private companies.  
  • The existing 7 and 25 year loan options will be discontinued. 
  • Any existing loans will be transitioned to the new 10 year loan model.

Proposed Change Rationale Commentary

New loan rules will be implemented for complying Division 7A loans. The loan model will have a maximum term of 10 years with a variable interest rate and payments of both principal and interest in each income year.

The maximum term of a loan will be 10 years. Consistent with current practices, the loan effectively begins at the end of the income year in which the advance is made. This is because the taxpayer is given until the lodgment day (the earlier of the actual date of lodgment or lodgment due date) of the private company’s income tax return to repay the loan or put it on complying loan terms.

The minimum yearly repayment amount consists of both principal and interest:

  • The principal component is a series of equal annual payments over the term of the loan.
  • The interest component is the interest calculated on the opening balance of the loan each year using the benchmark interest rate.

Where the minimum yearly repayment has not been made in full, any shortfall will give rise to a deemed dividend for the year.  This is consistent with the current laws.

Repayments of the loan made after the end of the income year, but before the lodgment day for the first income year are counted as a reduction of the amount owing - even if they are made prior to the loan agreement being finalised.

The current Division 7A loan model includes complex rules relating to apportionment of repayments between principal and interest. These rules place an administrative burden on advisors and taxpayers. The new ten-year loan model is simpler than the current apportionment model and more closely aligned to commercial practice for principal and interest loans.

This loan model is preferred from a policy perspective as annual payment encourages proactive cash flow management by businesses and reduces the size of payments (ten smaller payments) relative to the Amortisation Model in the Board of Taxation report. It's also easier to calculate the required interest and principal repayment amounts than under the Amortisation Model.

Similarly, although an interest-only model is simple in operation, it's not consistent with the policy intent behind Division 7A which requires repayment of principal over time. This is because there is an expectation that amounts borrowed from private companies will be returned over time to shareholders as dividends and taxed at the shareholders’ marginal tax rates.

In principle, the 10 year loan model will create a simpler set of rules for the majority of taxpayers. However, to ensure simplicity and an equitable transition for all private businesses, there are issues with the finer details of the Treasury’s proposal which require attention. (outlined below)

The removal of the 25 year loan option will create a limit on the type of investments private businesses can  finance under Division 7A’s revised ‘ten-year loan model.’ 


Interest rate

The annual benchmark interest rate will be the Small business; Variable; Other; Overdraft   Indicator lending rate most recently published by the Reserve Bank of Australia prior to the start of each income year.

The change in the indicator lending rate to be used for Division 7A purposes was suggested by the Board of Taxation in the context of an interest only loan concept.

The existing benchmark interest rate is the ‘Loans; Banks; Variable; Standard; Owner-occupier indicator lending rate published by the RBA which currently is 5.2%.  The modified benchmark interest rate would be 8.3%.

 There appears to be no rationale to support increasing the benchmark interest rate to 8.3% in the case of the ten year loan model, where the loan is being repaid progressively over the term of the loan. This can be contrasted with the interest only terms under a model proposed by the Board of Taxation. This is not a change that simplifies the law. The change would only increase the cost to shareholders in private companies who are accessing funds in those companies.

 

Loan agreements
There will be no requirement for a formal written loan agreement, however written or electronic evidence showing that the loan was entered into must exist by the lodgment day of the private company’s income tax return. This evidence must show:

  • the parties to the loan;
  • the agreement that the loan be made, including details of the date and evidence of its execution and binding nature on the parties to the agreement; and
  • the loan terms (the amount of the loan, the date the loan was drawn, the requirement to repay the loan amount, the term of the loan and the interest rate payable).

 

 

The proposed approach is a missed opportunity for simplifying Division 7A. The change only takes away the need for a formal loan agreement and in effect opens a new area of potential dispute.

Currently a written loan agreement needs to be put in place before the lodgment date.  This is an administrative burden, but one that most advisors are now well practiced at managing. Replacing loan agreements with only having to evidence entry into a loan arrangement and its terms is a step backward.

A preferred alternative - that would also be a simplification from the current situation- is for advances made by a private company to a shareholder (or associate), to automatically fall under the 10 year loan model unless the parties can evidence a contrary intent, i.e. an opt out approach.  


Interest calculations

Interest is calculated for the full income year, regardless of when the repayment is made during the year (except Year 1). If the loan is paid out early, that is before Year 10, interest will not be charged for the remaining years of the loan.

The current Division 7A loan model includes complex rules relating to apportionment of repayments between principal and interest. These rules place an administrative burden on advisors and taxpayers. The new ten-year loan model is simpler than the current apportionment model and more closely aligned to commercial practice for principal and interest loans.

There is limited rationale for this approach on interest calculations. The interest on Division 7A loans should be calculated on a commercially realistic basis, not in the artificial way that is being proposed.

Most private company groups are accustomed to dealing with commercial loan arrangements. 

 Under the proposed approach, an advance repaid on 1 July would attract a full year of interest - this is not justifiable.

 If this proposed change is adopted, there will be a significant need for pre-planning by any private company groups making any loans to shareholders/associates.

Transitional rules – 7 year loans

All complying 7-year loans in existence as at 30 June 2019 must comply with the new proposed loan model and new benchmark interest rate to remain complying loans, but will retain their existing outstanding term.

For instance, a loan maturing 30 June 2021, will continue to mature on this date. This means that under the transitional rules, its remaining term will be 2 years. The outstanding loan balance would be repayable over 2 years, and interest would be charged using the new benchmark interest rate under the proposed model.

Current loan agreements with written reference to the benchmark interest rate should not be required to be renegotiated under this option.

  There are limited issues associated with transitioning existing 7 year loans to 10 year loans, subject to the above comments on the 10 year loan model. 

Transitional rules – 25 year loans

All complying 25 year loans in existence as at 30 June 2019 will be exempt from the majority of changes until 30 June 2021. However, the interest rate payable for these loans during this period must equal or exceed the new benchmark interest rate.

On 30 June 2021, the outstanding value of the loan will give rise to a deemed dividend unless a complying loan agreement (10 year loan model) is put in place prior to the lodgment day of the 2020-21 company tax return. The first repayment will be due in the 2021-22 income year.

 

Where the existing 25 year loan has a remaining term of 12 years or less, transitioning to 10 year loans would appear to have limited issues associated with it, subject to the above comments on the 10 year loan model.

Where the existing 25 year loan has a longer remaining term, (greater than 12 years) there’s potential for material financial impact with the implementation of this change.

Businesses and shareholders have made long term investment decisions based on tax laws that permitted a 25 year loan.  Any change in the tax laws needs to have strong regard to the impact on the investment decisions that have been made.

A preferred approach would be to allow an option for existing 25 year loans to remain in place based on their current terms 


Old s108 loans

Old s108 loans (being loans that pre-date the introduction of Division 7A in 1997) will become subject to Division 7A.  Commencing from 2022, these loans will need to be repaid based on the 10-year loan model.

Proposed Change Rationale Commentary

For outstanding pre-1997 loans, the proposed transitional rule will provide an affected borrower with a two-year grace period before the first repayment is due, with the loan to be repaid over the subsequent 10 years.

Under the transitional rules, pre-1997 loans will be taken to be 'financial accommodation' as at 30 June 2021. The taxpayer will have until the lodgment day of the 2020-21 company tax return, to either pay out the amount of the loan or put in place a complying loan agreement, otherwise it will be treated as a dividend in the 2020-21 income year. The first repayment will be due in the 2021-22 income year.

This will provide certainty for taxpayers and protect them from exposure to Division 7A, if the Commissioner were to consider that there was no longer a commercial loan in existence and deemed it to be forgiven.

This is one of the most contentious aspects of the proposed changes and an area where significant pre-planning is going to need to be undertaken by private groups.

Treasury, like the Board of Taxation, seem clear in their view that these loans need to be brought into the Division 7A system. The stated rationale for the change is weak.  The real rationale would appear to be a desire to have all taxpayers on the same footing in relation to loans from private companies.  

Against the proposed change is the view that the change is effectively retrospective, as these loans were made in compliance with the terms that existed at the time.  

But there is also a perception that these loans should be brought to tax at some point in time – many of these loans will have been outstanding for over 20 years with no repayments being made or interest charged.  Left to the taxpayer, it is doubtful that many of these loans will be repaid any time soon.

An extended transitional period is warranted if this these loans are brought into Division 7a, so that the financial impact on affected taxpayers is manageable.


 

  A loan will generally be treated as being forgiven in circumstances where it has become statute-barred under the relevant Limitations Act. Generally, a loan becomes statute-barred when the period within which a creditor is entitled to sue for recovery for the debt ends. It is expected that many loans made before 4 December 1997 would already have been statute barred and thus have given rise to a deemed dividend for the borrower [in a prior year].

These statements are made in the consultation paper.

Caution should be exercised before proceeding on the basis that a loan has become statute barred.  This is a complex legal question where the rules vary between States, and where the interaction with Division 7A is potentially flawed resulting in the intended outcome not being achieved.


Forgiving a loan

The forgiveness of a loan that has previously been deemed to be a dividend does not give rise to a further deemed dividend.  This is the case even if the first deemed dividend was reduced (due to the distributable surplus rules) or where the deemed dividend was never included in the shareholder’s tax return and the amendment period has now expired.  The proposed change would require that the deemed dividend was actually included in the shareholder’s tax return for the subsequent forgiveness of the debt not to trigger further Division 7A implications.

Proposed Change Rationale Commentary

Section 109F provides that a private company will be taken to pay a dividend to an entity if the company forgives a debt owed by the entity to the company and the entity was either a shareholder; or an associate of a shareholder at that time or a reasonable person would conclude that the debt was forgiven because the entity had been a shareholder or associate at some point.

However, section 109G sets out a number of exceptions to this general rule. In particular, subsection 109G(3) provides that a forgiven debt will not give rise to a dividend if the loan that resulted in the debt giving rise to a deemed dividend under section 109D.

Subsection 109G(3) will be amended to ensure this exception only applies where the earlier dividend that the company was taken to have paid has been taken into account in the income tax assessment of an entity or entities.

Like other elements of the proposed changes, the intention is that the economic benefit received by the shareholder (or their associate) should ultimately be what it is taxed.

This is a change where the detail of the legislation will be important.

It would seem reasonable to tax windfall benefits, such as where a taxpayer fails to include an earlier deemed dividend in their tax return.

However, where the loan arose in circumstances where there was no distributable surplus, it would suggest that there were no profits in the company so the policy of Division 7A (shareholders accessing profits of private companies without paying appropriate tax are personal marginal rates) would not appear to be offended.  This change may not be warranted in these circumstances, or the change may only be appropriate to apply to loans created after the distributable surplus concept is removed (which is one of the proposed changes).


Non-resident private companies

Division 7A applies to payments, loans and forgiven debts by private companies regardless of the residency or place of incorporation of the private company.  This leads to an unnecessarily complex analysis for some taxpayers as Division 7A, in theory, deems a dividend to arise to a non-resident shareholder that receives a loan from a non-resident private company, that has no Australian sourced profits or Australian based assets.  It's only through recourse to other parts of the tax laws that this scenario does not result in taxable income arising.

Proposed Change Rationale Commentary

Section 109BC was introduced to clarify that Division 7A also applies to loans, payments and debt forgiveness by non-resident private companies.

Some stakeholders have highlighted that the application of Division 7A to non-resident private companies in certain circumstances continues to be uncertain – for example: whether it applies only where the shareholder of the private company (or their associate) is an Australian resident, how ‘source’ considerations apply to the deemed dividend and how the provisions potentially interact with the transfer pricing rules and double tax treaties.
 

 

The limitations in the scope of Division 7A need to be embodied in Division 7A.

Division 7A should only apply where, had a dividend been paid in the same circumstances, the shareholder/associate would have been assessable on the dividend.  This would require that the shareholder/associate is an Australian tax resident.


Distributable surplus

Currently a Division 7A deemed dividend is limited to the distributable surplus of the private company.  Distributable surplus is a proxy for profits, although it is poor proxy in many cases.  The proposed change is to apply Division 7A to the economic benefit received by the shareholder/ associate.  This would be achieved by removing the concept of a distributable surplus.

Proposed Change Rationale Commentary

The amendments will remove the concept of distributable surplus. 

Capping the amount of the deemed dividend is considered contrary to the efficient operation of the Division 7A integrity rule. That is, if a certain amount is ‘distributed’ to the shareholder, then tax should be paid on the entire amount, and it should not be arbitrarily limited.

This will ensure the integrity of Division 7A so that dividends can be deemed for the entire value of the benefit that was extracted from the private company. 

This will also align the treatment of dividends with section 254T of the Corporations Act 2001 (Cth) which allows dividends to be paid out of both profits and capital.
 

It is well known that the distributable surplus concept is flawed and does not achieve its intended outcome.  

This change may appear more of an issue than what it truly is.

Reliance on the absence of a distributable surplus to argue no Division 7A deemed dividend can often by misplaced as the interposed entity provisions could have application (where did the no distributable surplus get the funds from in order to make the loan?).

Safeguards will be needed to ensure distributions of share capital are not deemed to be dividends.

The section 254T rationale is flawed.  Alignment with the Corporations Act position is not achieved.  


Unpaid present entitlements

The ATO’s interpretation of the Division 7A treatment of UPEs changed in December 2009.  From that time, the ATO’s view became that UPEs are loans for Division 7A purposes.  Any question over this treatment will be addressed by the proposed change which will legislate that UPEs are to be treated consistent with loans for Division 7A purposes. 

Proposed Change Rationale Commentary

Where a UPE remains unpaid at the lodgment day of the private company’s income tax return, the UPE will be a deemed dividend from the company to the trust (which is assessable at the marginal tax rates of the beneficiaries or the top marginal tax rate, if assessable to the trustee); or alternatively the UPE can be put on ‘complying loan terms’ under which principal and interest payments are required to be made.

All UPEs that arise on, or after, 1 July 2019 will need to be either paid to the private company or put on complying loan terms under the new 10-year loan model prior to the private company’s lodgment day, otherwise they will be a deemed a dividend.

This addresses the questions over the current interpretation applied by the ATO to UPEs. Clarification of this issue is welcomed.
All UPEs arising on, or after 16 December 2009 and on, or before, 30 June 2019, that have not already been put on complying loan terms or deemed to be a dividend, will need to be put on complying terms by 30 June 2020. The first repayment for such loans would be due in the 2019-20 income year. Any amounts outstanding that have not been put on complying loan terms by the end of the 2019-20 income year will result in a deemed dividend for the outstanding amount of the UPE. Existing UPEs will be transitioned to 10-year loan terms, consistent with the approach being taken in relation to existing 7-year Division 7A loans.

The main issue with this change is the legal issues associated with modifying existing sub-trust arrangements.  

Particular care will be needed in dealing with specific asset sub-trusts.  Greater transitional measures may be required in relation to these arrangements. This is one of the questions raised in the consultation paper.


The consultation paper raised the question of whether UPEs arising prior to 16 December 2009 (the date the ATO’s position changed) should be brought within Division 7A? The policy rationale is similar to that being applied to old s108 loans.  The objective appears to be, to get all taxpayers on a consistent footing regardless of the timing and nature of their extraction of funds/value from a private company.  There is also an objective of removing underlying questions on the potential application of Division 7A, for example, treating long outstanding UPEs as a form of financial accommodation.

This change raises similar issues to s108, and if made, warrants extended transitional measures.

Whilst it’s raised as a question in the consultation paper, it is difficult to see a situation where pre 2009 UPEs will be excluded from Division 7A but all other UPEs and all loans will be included.

One of the areas where UPEs were most frequently used was to allow a trust that operated a business to retain funds for working capital purposes where the funds were only taxed at the corporate tax rate.

Although exceptions in tax laws tend to create complexity, an exception may be warranted for pre 2009 UPEs where the funds have been applied for income producing purposes – i.e. an otherwise deductible rule.  

Private groups with pre 2009 UPEs will need to start planning for these proposed changes.


Self correction of errors

The existing restricted mechanism for correction of errors in prior year Division 7A positions will be removed and replaced with an expanded self assessed correction mechanism. 

Proposed Change Rationale Commentary

Consistent with the Board’s recommendation, qualifying taxpayers will be permitted to self-assess their eligibility for relief from the consequences of Division 7A, which will operate to reverse the effect of a prior deemed dividend arising under the law.

To qualify for self-correction, the taxpayer will need to meet eligibility criteria in relation to the benefit that gave rise to the breach. The eligibility criteria will require that:

  • on the basis of objective factors, the breach of Division 7A was an inadvertent breach;
  • appropriate steps have been taken as soon as practicable (and no later than six months after identifying the error unless the Commissioner allows more time) to ensure that affected parties are placed in the position they would have been in had they complied with their obligations; and
  • the taxpayer has taken, or is taking, reasonable steps to identify and address any other breaches of Division 7A.

Under this approach, in order to self-correct an eligible taxpayer must:

  • convert the benefit into a complying loan agreement, on the same terms that would have applied had the loan agreement been entered into when it should have been; and
  • make catch-up payments of the principal and interest that would have been payable as prior minimum yearly repayments had the taxpayer complied with Division 7A when it should have. The interest component of the catch-up payment will be compounded to reflect prior year non repayments. This compounded interest should be declared as assessable income in the private company’s income tax return for the income year in which the catch-up payment is made.

In certain cases, the concept of self-correction may include other appropriate action considered reasonable by the Commissioner based on the taxpayer’s circumstances. Reasonable circumstances would be set out by the ATO in its public advice and guidance products.

The current law has not operated as taxpayers (or the ATO) would have liked.  

The correction mechanism required an exercise of discretion by the Commissioner, rather than self-assessment.

Further, the grounds on which the Commissioner could exercise the discretion were quite narrow.

This change is welcomed and should allow most taxpayers to correct unintended Division 7A errors and issues from prior years.

Period of review

A 14 year amendment period is being proposed for Division 7A.  This is based on the 10 year loan term plus the standard 4 year amendment period.

Proposed Change Rationale Commentary

To improve integrity and ensure compliance with the new loan model, as well as the ability to self correct, it is proposed that the period of review for Division 7A transactions be extended to cover 14 years - after the end of the income year in which the loan, payment or debt forgiveness gave rise or would have given rise to a deemed dividend. This will apply from 1 July 2019.

This approach is consistent with other areas of the law in which there are an extended period of review, including capital gains tax and loss recoupment rules.

 

Whilst a 14 year amendment period appears excessive on the surface, within the design of the revised Division 7A provisions it has some logic.

This change would enable the full loan period to be reviewed and would curtail situations where a taxpayer escapes the application of Division 7A by being outside the 4 year amendment period.

This proposed change would support a “opt out” basis for implementing the 10 year loan model.


Private use of assets 

The use of assets of a private company by shareholders or their associates will be a payment (by definition) for Division 7A purposes.  The amount of the payment is the market value of the usage, which can be difficult to ascertain.  It is proposed that a safe harbour formula will be included in the legislation.

Proposed Change Rationale Commentary

In implementing the measure, a safe harbour comprising a formula and accompanying rules will be legislated.
The taxpayer will continue to be able to use their own calculation of the arm’s length value instead of the legislative formula.

The safe harbour will apply for the exclusive use of all assets excluding motor vehicles. This is because the market value for rental of a motor vehicle is readily ascertainable by other means.

The safe harbour will generally apply unless the taxpayer has received a non exclusive right to use an asset. 

The proposed formula for the safe harbour is:

Where:
A = Value of asset at 30 June, for the income year in which the asset was used.
IR = benchmark interest rate plus 5 per cent uplift interest.
Days used = days shareholder (or their associate) used or had the exclusive right to use the asset.
Days in year = days in income year (i.e. 365 or 366).

The safe harbour will provide that:

  • the value of the asset is its cost – this includes any improvements made over the life of the asset. Where an asset is held for more than five years, its value will instead be the greater of the cost or the value determined by a market valuation. This is to ensure that the formula, at a minimum, reflects the cost of the asset to the business while ensuring the increase in value for appreciating assets (e.g. real property) is factored into the calculation;
  • a formal market valuation of the asset is required every five years;
  • the charge is based on actual number of days used by the shareholder (or their associate), unless the shareholder (or their associate) have the exclusive right to use the asset at other times; and
  • the rules apply to both appreciating and depreciating assets.

If the consideration given by the shareholder or their associate for use of the asset is equal to or exceeds the amount that would have been paid at arm’s length, the amount of the Division 7A payment is nil.

The shareholder (or their associate) can avoid a deemed divided by ensuring that an arm’s length amount for usage is paid.

The determination of this arm’s length amount in some cases can be difficult to ascertain and increases compliance costs for taxpayers.

The Board of Taxation recommended the design of legislative safe harbours to facilitate compliance, reduce uncertainties and lower administrative costs for taxpayers. It was also suggested that the rules should distinguish between appreciating and depreciating assets.

Providing this formula as an optional safe harbour is a positive step in simplifying compliance with these provisions.

Amendments will be made to ensure that a payment under section 109CA for an income year should be taken, to be made on the first day in that income year that the entity uses the asset or has a right to use the asset (regardless of whether this is an exclusive right). This will provide certainty to taxpayers.

Subsection 109CA(2) outlines the time when a payment is taken to be made for Division 7A purposes where a private company provides an associated entity with the use of an asset. This payment occurs when the entity first uses the asset or has the right to use an asset in circumstances where the provider does not have that same right.

However, this rule currently does not address the case where an entity receives a valuable non exclusive right (i.e. where the provider maintains a right to use the asset). In this case, while a payment will be taken to be made, the time at which the payment is taken to be made is ambiguous. This is an unintended anomaly.

This is a technical amendment and shouldn't be one that materially impacts on taxpayers.

Loans made in the ordinary course of business

Loans made by a private company in the ordinary course of its business are excluded from Division 7A.  There has been some ambiguity over the scope of this exception: for example, does an internal group finance company fall within these rules?  The confusion is compounded by recent ATO guidance on when a company will be considered to be carrying on a business.  The proposed amendments will limit the scope of the exception to the generally accepted position, being that it only applies to private company that make loans in the ordinary course of a business of lending money to third parties. 

Proposed Change Rationale Commentary

Section 109M will be amended to limit the exception to loans in the ordinary course of a business of lending money to third parties, rather than in the ordinary course of any business. These loans will continue to be required to be made consistent with the usual terms on which the company makes loans to third parties and on an arm’s length basis. This amendment will provide clarity and further integrity to Division 7A.

Section 109M prevents Division 7A from applying to loans made in the ordinary course of an entity’s business if the loan is made on the usual terms offered to arm’s length parties. This was intended to ensure that shareholders of businesses that primarily derived income from money-lending were not prevented from dealing with those businesses on their ordinary terms.

Section 109M was intended to operate so that a private company will not be taken to pay a dividend only in circumstances where the loan is made:

  • in the ordinary course of a business of lending money to third parties;
  • on an arm’s length basis; and
  • on the usual terms on which the private company makes similar loans to parties at arm’s length.

It is noted that the ATO has recently updated its guidance on when a company carries on a business and that this may have flow-on effects for the operation of this provision.

This proposed amendment clarifies the limited scope of the s109M exception.  For most taxpayers, and certainly those that have adhered to the ATO guidance on this section, there will be no real impact arising from this amendment.

Interposed entity rules 

The interposed entity rules are an integrity rule within Division 7A to capture loans or payments made indirectly (via other entities) from a private company to a shareholder or associate.  The proposed amendment would strengthen the tests for when the interposed entity rules could be applied.

Proposed Change Rationale Commentary

Subsection 109T(1) will be amended to apply in any case where a loan, payment or other benefit is provided to a taxpayer. If a reasonable person would conclude that this benefit would not have been provided, but for a loan, payment or other benefit being provided or being expected to be provided by the private company to another entity (whether or not this is the same entity that provided the benefit to the taxpayer).

It can be problematic to establish that an entity is ‘interposed’ within the meaning of paragraph 109T(1)(a) where the quantum or nature of the benefit provided to the taxpayer differs from the benefit provided to the interposed entity.

This change ensures the provision gives effect to the underlying policy intention to bring to account indirect benefits, even if the payment or loan that results in the indirect benefit also has other commercial purposes.

The detail of this proposed change will need to be seen before we can determine if it is an appropriate amendment.

We would suggest that the interposed entity rules are a component of Division 7A that requires greater review and amendment to reduce its complexity.

The interposed entity rules are already an incredibly broad set of rules. They capture numerous factual situations that do not offend the policy of Division 7A, and it is only through the basis on which the Commissioner will make a determination to apply the rules that these situations don’t give rise to deemed dividends


FBT

Shareholders and associates of private companies can often have multiple relationships with the company, such as being both shareholders and employees.  The interaction of Division 7A and FBT in relation to benefits provided to these employee/shareholder situations is key.  The proposed amendments will clarify some aspects of these interactions. 

Proposed Change Rationale Commentary

To improve the clarity and integrity in relation to the interaction between Division 7A and the FBT provisions, amendments will be made to clarify that:

  • the exception in subsection 109ZB(3), which provides that Division 7A does not apply to payments made to shareholders (or their associates) in their capacity as an employee (or an associate of such an employee), only applies where that payment would constitute a fringe benefit. In determining if a payment is a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986, paragraph (r) should be disregarded;
  • former shareholders (or their associates) should be treated consistently with current shareholders. The exception in subsection 109ZB(3) will be extended to ensure that Division 7A will not apply to payments to former shareholders or associates of former shareholders in their capacity as an employee if the payment was a fringe benefit; and
  • FBT will not apply to payments to former shareholders and their associates that are otherwise captured by Division 7A.

These amendments will clarify and provide integrity in relation to the interaction between Division 7A and the FBT provisions.

 

Any changes that make the rules more objective and less subjective when deciding on which set of provisions (FBT or Division 7A) apply in particular circumstances would be welcomed.

Other changes 

The proposed changes include an amendment to confirm that deemed dividends are not tax deductible.

Proposed Change Rationale Commentary

To provide certainty, section 109Z will be amended to make clear that a payment that's taken to be a dividend under Division 7A isn't an allowable deduction.

Currently, payments, loans and other benefits that give rise to a deemed dividend are not deductible, but this is not specifically addressed in the legislation.

 

This is consistent with the current legislation.

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