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Proposed tax changes to Division 7A

Proposed tax changes to Division 7A

Clive Bird discusses proposed tax changes to the Shareholder Loan rules in Division 7A, which will impact small to medium businesses all across Australia.

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Proposed tax changes to the Shareholder Loan rules in Division 7A will impact small to medium businesses all across Australia.

The proposed amendments are contained within Treasury’s ‘Targeted amendments to Division 7A’ discussion paper which was released on 22 October 2018.

Broadly, these rules were introduced to ensure loans made to shareholders out of private companies and related trusts are taxed as if they were dividends. This applies where the loans are funded by profits which have been taxed at the company tax rate. There is a key exclusion for loans that are subject to a complying written loan agreement, interest charges and principal repayments typically over a short seven year period (or 25 years in the case of securitised loans). The rules were first introduced in December 1997.

Currently, loans entered into prior to December 1997 are exempt from complying with these rules. Treasury is now proposing that such loans be subject to Division 7A, requiring repayments over a 10 year period. This represents a retrospective change going back more than 20 years, placing onerous compliance and cash flow obligations on Australian business taxpayers.

Treasury has also proposed that loans should be treated as dividends even where they are not funded out of company profits. This could mean that benefits received by shareholders are taxed, even if they represent a return of the capital contributed by shareholders. This would be a clear departure from the policy intention of these rules historically and would introduce some presumably unintended outcomes.

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