Government urged to prioritise Div 7A reform this year

The submission noted that uncertainty surrounding Division 7A and unpaid present entitlements (UPEs) had returned to the spotlight following the Full Federal Court's decision in Commissioner of Taxation v Bendel last year.

The court found that a UPE between a corporate beneficiary and a trust did not constitute a loan under section 109D(3) of the Income Tax Assessment Act 1936, challenging the ATO's views in TD 2022/11 and TR 2010/3.  

The High Court granted the Commissioner special leave to appeal the Full Federal Court decision, with the High Court's final judgment expected to be handed down at some point in the first half of 2026. 

"We recommend that, once this issue is resolved when the High Court hands down its decision later this year, further consultation be undertaken to revisit ways to minimise the operation of Division 7A to businesses that use corporate profits to fund business activities," the IPA said.

The professional body noted that while the previous government acknowledged that Division 7A required urgent reform, amendments to the provisions have since failed to progress.

The government announced in the 2017 federal budget that amendments would be made to Division 7A following the release of the Board of Taxation's final report on the ‘Post Implementation Review of Division 7A of Part III of the Income Tax Assessment Act 1936'. Treasury then released a consultation paper in September 2018 to seek stakeholder views on proposed amendments to Division 7A. 

The IPA said that although the consultation paper was influenced by the Board of Taxation's final report, it also made "significant departures" from the recommendations in the report. 

"If legislated in its current form, there is potential for a substantial increase in compliance costs and tax payable by business entities using trusts for business purposes," it said.

The recommendation by the Board of Taxation report for a once-and-for-all election to exclude loans from companies, including UPEs owing to companies, from the operation of Division 7A, was not included in the proposed amendments.

"The consultation paper [took a] selective approach, removing the ability to choose to be excluded from the Division 7A regime, while introducing many of the integrity aspects," the IPA said. 

"Some aspects of the recommendations from the Treasury consultation paper are of concern, such as the removal of the concept of distributable surplus."

The IPA said that, while finding a workable solution for the issues surrounding Division 7A would be challenging, delaying reforms in this area was further exacerbating the situation and creating "an enormous amount of uncertainty". 

It noted that the Board of Taxation report included a number of recommendations designed to ease the compliance burden associated with the rules that govern distributions from private companies and to lower the cost of working capital for private businesses. 

"This is a good starting point, and we welcome further consultation on the reform of Division 7A," the IPA said.

The Tax Institute has also emphasised the need for the government to address uncertainty from unresolved laws such as Division 7A.

In a recent policy paper, the association said the Bendel decision and the ATO's interim decision to maintain its long-held position pending the High Court decision "demonstrated the consequences of leaving the long-standing provisions like Division 7A unresolved".

"Division 7A is well overdue for proper reconsideration and reform."