Amendments in Division 7A
Extensive amendments were previously outlined in Treasury’s Targeted amendments to Division 7A; which commencement was originally set to on 1 July 2019 but has since been pushed back to 1 July 2020.
What is Division 7A?
Division 7A is an anti-avoidance measure designed to stop private companies distributing tax-free profits to shareholders or their associates. It applies to loans, advances, payments and other credits made by companies to their shareholders or associates.
Division 7A is triggered when a company:
- Makes payments to a shareholder or shareholder’s associate, including transfers or use of property for less than market value.
- Lends money to a shareholder or shareholder’s associate without a specific loan agreement, and the loan is not fully repaid by lodgement day of that income year.
- Forgives a debt owed by a shareholder or shareholder’s associate to the company.
What changes are set to be made?
The most prominent of the amendments expected to take place on 1 July 2020 included:
- Division 7A loans under the new rules would only allow for a maximum 10-year loan agreement. Annual repayments of principal and interest would be required to prevent a deemed dividend from arising.
- Transitional rules would be introduced to ensure that all existing Division 7A loans are brought into the 10-year loan model. 7-year loans would retain their existing outstanding term. While existing 25-year loans would be largely exempt from the new rules until 30 June 2021.
- Unpaid present entitlements (UPEs) will trigger a deemed dividend unless they are paid out or placed under a complying loan agreement by the lodgement day of the company’s tax return. Existing UPEs that arose between 16 December 2009 and 30 June 2019 will be brought within the scope of these new rules as well.
The upshot of this is that the 7-year and 25-year Division 7A Loan Agreements remain in place for at least another year.