Australia

Details

  • Service: Tax, Topics, Tax Reform
  • Type: Regulatory update
  • Date: 24/04/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Grant Wardell-Johnson

Grant Wardell-Johnson
Leader, Australian Tax Centre

+61 2 9335 7128

gwardelljohn@kpmg.com.au

Division 7A reform: the next step for simplification? 

by Grant Wardell-Johnson, Australian Tax Centre

Division 7A was introduced in 1998 to treat certain transactions between private companies and shareholders or their associates as unfranked dividends on the basis that they are inappropriate distributions of profits. The division essentially re-enacted the main elements of its predecessor, section 108, with broadly the same objective. The rules are largely prescriptive, but with high administrative costs.

Over the years, Division 7A has grown in complexity. The Board of Taxation (the Board) identified over 20 issues including the definition of key concepts such as ‘loan’ and ‘associate’, practical difficulties in relation to loan repayments and guarantees, inconsistent treatment of different payments and particularly, the treatment of unpaid present entitlements.

 

Loans between interposed entities and the division’s application to non-resident companies also give rise to significant complexity. Further, the need to use the Commissioner’s discretion to address outcomes of Family Court proceedings and the interaction of Division 7A with FBT was of concern.

 

Approaches
To address these concerns, the Board put forward three non-exclusive approaches to reform:

  • Adjustment model: amend specific provisions only.
  • Statutory interest model: apply statutory interest rate to related entity loans with no minimum repayment required.
  • Distribution model: undistributed profits retained for permitted purposes, otherwise deemed to be frankable dividends.

 

The latest second discussion paper, released on 25 March 2014, provides the Board’s preliminary views on the three models and proposes three further components of a new value transfer model to replace the existing provisions:

 

  • A new simplified regime for complying loans.
  • A limited exclusion for UPEs owed by trusts that ‘tick the box’ and forgo access to the CGT discount.
  • Introduction of a self correcting mechanism.

 

Emerging from the efforts of much consultation, this fourth model appears to be the most likely step for Division 7A going forward.

 

Submissions are due 9 May 2014.

 

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