A consultation paper has been released by Treasury containing a number of measures including a new 10 year loan model for all existing 7 and 25 year loans, a self-correction mechanism to rectify breaches of Division 7A, and safe harbour rules for the use of assets.
Speaking to Accountants Daily, HLB Mann Judd director, Alexander King said the proposed amendments were broadly in line with previous announcements but provided some additional details.
“The government doesn’t appear like it will implement the Board of Taxation’s proposal to use either an amortisation model or interest only model. The board proposed these models because they provided taxpayers more flexibility to repay Div 7A loans.
“Instead, the government has proposed replacing the current 7 year and 25 year loans with a loan model that will have a maximum 10-year term, with a variable interest rate that requires payments of both principal and interest each year.
“All existing 7 year and 25 year loans will be required to transition to the new 10-year loan model. It doesn’t appear any grandfathering will be available for existing loans.”
“The new rules will also impact pre-1997 loans. Many taxpayers will have pre-1997 loans sitting on their balance sheet. However, under the new rules taxpayers will need to put these under a complying loan agreement by the end of the 2020–21 income year.”
According to TaxBanter senior tax trainer, Robyn Jacobson, one of the other surprises from the consultation paper includes a 14 year amendment period proposal.
“Significantly, the consultation paper proposes a new 14-year period of review, which would allow the Commissioner to amend a tax return to include a dividend well beyond the existing 4-year amendment period which applies generally to taxpayers,” said Ms Jacobson.
“This addresses the government’s concerns that over the years taxpayers have claimed the Commissioner is out of time to amend to include a deemed dividend that arose outside the amendment period.”
Further, as announced in the 2018–19 federal budget, unpaid present entitlements will come within the scope of Division 7A, in a move that will ensure the UPE is either required to be repaid to the private company over time as a complying loan or subject to tax as a dividend.
“UPEs arising on or after 16 December 2009 will need to be paid to the company, or put on complying 10-year loan terms by 30 June 2020. The government is still seeking feedback on whether the new rules should also apply to UPEs arising before 16 December 2009, which are currently quarantined from Div 7A,” said Ms Jacobson.
While moves to amend Division 7A have been long anticipated by the industry, the timing of the release of the consultation paper close to the proposed 1 July 2019 start date might cause some further uncertainty, said Ms Jacobson.
“Submissions are due by 21 November, so it is unlikely we would see any draft legislation before Christmas. So that leaves around 5 months for the government to release draft legislation, further consult, introduce the amending bill, secure the numbers in the Senate and enact the bill before 1 July 2019 and this is without factoring in the release of the federal budget and the next federal election,” said Ms Jacobson.
“Although it is pleasing to see some detail on the new rules, until this is bedded down by way of enacted bill, there will be ongoing uncertainty on the impact of these proposed measures on taxpayers.”
Interested stakeholders can submit responses to the consultation by 21 November here.