In October, Treasury released long awaited details of 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.
The Tax Institute has now slammed the selective approach taken by Treasury, calling for an explanation of why the Board of Taxation’s recommendations were not adopted.
“The Board’s Division 7A report made wide ranging recommendations precisely because one of the criticisms of the evolution of Division 7A was the constant ‘band-aiding’ of the Division,” said Tax Institute president Tracey Rens.
“The board therefore specifically rejected this as an approach and recommended a package of measures that could be adopted as a replacement to Division 7A.
“The Board of Taxation’s recommendations were made after extensive consultation and engagement with practitioners, the ATO, Treasury officials and taxpayers,” she added.
“In our opinion, the measures in the Consultation Paper represent another band-aid fix to Division 7A. We would strongly encourage the government not to continue the errors of the past by, once again, applying band-aid fixes to the Division.”
The Tax Institute’s submission takes aim at a number of proposed amendments, including calling for the proposal to remove the concept of “distributable surplus” to be dropped.
“By removing the concept of distributable surplus, Division 7A arguably becomes broader in its application than originally intended,” said the submission.
“Removing the distributable surplus means that loans not funded from company profits (e.g., from share capital or loans) can be treated as unfranked dividends. This can result in double or triple taxation, especially where franking credits are denied.”
The submission was also critical of the lack of grandfathering of 25-year loans, noting that such loans are secured by real property and by placing them on 10-year terms would involve significant expense in terms of documentation and discharging the mortgage.
The proposal for a 14-year amendment period was also questioned, noting that the length of time is not a review period of any area of the tax law and could represent an aspect of risk and uncertainty for taxpayers.
The Tax Institute has also called for pre-1997 loans to remain quarantined after Treasury proposed for both pre-1997 loans and unpaid present entitlements (UPEs) arising on or after 16 December 2009 to be either repaid or placed on 10-year complying loan terms from 1 July 2019.
“Pre-1997 loans have been quarantined for over 20 years. The new legislation intends to give a mere two-year grace period for taxpayers to organise payment of a substantial amount of money under Division 7A terms,” the submission said.
“As a result, taxpayers may need to realise assets, and some may end up facing potential financial hardship in order to be able to convert the outstanding amount into a compliant loan.”
Pitcher Partners tax partner Alexis Kokkinos had earlier raised concerns to the proposed amendments, outlining the increase in compliance costs and tax payable in some cases.