On Monday, Treasury released a consultation paper outlining amendments to Division 7A, years after a review by the Board of Taxation had put forward a number of recommendations to reduce compliance costs for corporate taxpayers.
However, Pitcher Partners tax partner, Alexis Kokkinos said the proposed changes were a mirror opposite of the recommendations, and would cause an increase in compliance costs, an increase in the tax payable by business entities within the private group, and an increase in the burden of meeting the rules.
As an example, the proposed requirement for loans to be repaid with annual payments, without giving businesses the option to have a three-year interest only period, as originally proposed, would significantly impact a business’ cash flow management, said Mr Kokkinos.
“This means a special purpose project entity within a business group, without cash flow, will need to fund annual repayments using dividends and pay tax at the top marginal rate,” said Mr Kokkinos.
“Those businesses will be required to repay loans using after-tax dollars funded at the 47 per cent tax rate, resulting in a double taxation and, in some cases, triple taxation if dividends cannot be franked.
“Treasury seems to justify the proposed amendments on the grounds that it ‘encourages proactive cash flow management’ but that’s simply ludicrous.”
Further, Mr Kokkinos believes the proposal to replace 25-year loans with a 10-year complying loan agreement will have a retrospective effect on existing transactions by ignoring those currently operating under legally binding agreements.
“For loans that currently have a 25-year loan term, this assumes taxpayers can simply amend agreements to a 10-year term. If not, such taxpayers will face a retrospective tax effect on their existing transactions,” Mr Kokkinos said.
“For most of these policy changes, there is no explanation and the decisions seem bizarre. We will be putting forward significant concerns with the release of this paper to the government and Treasury and encourage the business community to also make submissions, outlining their concerns with these proposals.”