For many years the tax laws around private company loans, payments and debt forgiveness, Division 7A of the Income Tax Assessment Act 1936 have caused problems for directors, shareholders and advisors alike. This area of the taxation law was introduced in December 1997 with the purpose of ensuring that profits of private companies which are taxed at the corporate rate are not paid to entities without additional tax being charged where appropriate. The legislation has been amended regularly since the first major amendment some three months later on 28 March 1998. The overall effect of so many amendments to correct real and perceived issues with the legislation has been to create one of the most complex and confusing set of rules in Australia’s extensive complex and confusing tax acts.
After 15 years of problems and calls for reconsideration of these provisions in 2012, the Assistant Treasurer announced that the Board of Taxation would examine the effectiveness of Division 7A and look at ways to simplify this area of the tax law. The Board also looked at the unintended outcomes and disproportionate compliance and administration costs.
On 20 December 2012, the Board of Taxation released a first discussion paper and a second paper was released in March this year.
This second paper clearly states what many of us have thought since 1997; ‘Division 7A fails in achieving its policy objectives and can be a significant source of compliance costs for business’. The paper outlines some specific proposals to make the rules easier and less costly for businesses to deal with. These include:
- a unified set of principles based around transfers of economic value;
- a simple measure of corporate profit which does not require valuations of assets;
- a single ten year period for complying loans with flexibility around the repayment of principle; and
- allowing trust entities to retain funds distributed to companies.
This last measure is linked to a proposal that where a trustee carries on a business the CGT discount will only apply to the goodwill of that business and not to other capital assets. As most business entities do not hold significant capital assets other than goodwill (for asset protection reasons) this seems an acceptable requirement.
The recommendation is that these changes are to be coupled with simple rules under which taxpayers can correct errors and put in place complying agreements in a far simpler manner than under the current rules.
The Board is due to complete its review by 31 October 2014 and many of us hope some changes will be made. Meanwhile if you have concerns about loans, forgiving loans or payments made by a private company and whether these may be deemed to be dividends under our current complex and confusing rules Julie Van der Velde will be pleased to assist with clarifying the issues and developing a plan to manage those issues going forward.
