From 1 July 2019, unpaid present entitlements will come within the scope of Division 7A of the Income Tax Assessment Act 1936, in a move that will ensure the unpaid present entitlement is either required to be repaid to the private company over time as a complying loan or subject to tax as a dividend.
Speaking to Accountants Daily, BDO national tax director, Lance Cunningham said the measure would help simplify current rules around unpaid present entitlements.
“Currently we've got some really quite complex rules around unpaid present entitlements where a trust distributes income to a company and that distribution is not paid so it stays unpaid and there are some very complicated rules that the tax office has covered off in a tax ruling and a PS LA about how to treat them,” said Mr Cunningham.
“They are going to simplify them by saying these unpaid present entitlements will automatically be treated as a loan.
“The treatments for the unpaid present entitlements is more concessional than for a loan so what they are doing is saying, 'forget all of that complicated concessional stuff we did with unpaid present entitlements, we're going to treat it as a loan so you then have to put it under the normal loan rules for Division 7A. You'll have to have loan agreements, and you'll have to make payments of principal and interest each year’.”
Mr Cunningham also noted that other integrity measures in relation to Division 7A announced in the 2016-17 budget have been deferred from 1 July 2018 to 1 July 2019 to allow all Division 7A amendments to be progressed as part of a consolidated package.