Amendments to shareholder loan provisions – Division 7A and what it means

You may have heard about impending changes to Division 7A and wondered what it was all about.

In this article, we provide an overview of what the changes to Division 7A mean and explain how we can help.

What is Division 7A?

Division 7A of the Income Tax Assessment Act 1936 aims to prevent shareholders (or their associates) from inappropriately accessing the profits of private companies via payments, loans or debt forgiveness transactions without recognition as income by the ultimate beneficiary.

Essentially, Division 7A stops private companies from avoiding dividend taxation and making tax-free distributions of profits to shareholders.

Upcoming changes

In the 2016-17 Federal Budget, the government announced a range of changes to simplify the Division 7A rules, based on recommendations in the Board of Taxation’s Post Implementation Review into Division 7A.

Specific details about the amendments have been limited so far, but according to the Australian Taxation Office, the changes will include: 

• the introduction of a self-correction mechanism for inadvertent breaches of Division 7A by taxpayers;
• safe harbour rules to provide certainty and simplify compliance for taxpayers;
• simplified Division 7A loan arrangements; and
• technical amendments to improve the operation of Division 7A.

The changes take effect from July 1, 2018.

“The process has been simplified so that companies that have related party loans aren’t going to be disadvantaged as much as they have been in the past,” LDB principal Daniel Dubois said.

“It’s always difficult when businesses advance money to their stakeholders in ways other than salaries and wages, and it’s difficult to get the compliance aspects of that right.

“What these changes are going to do is make it possible for entities to rectify the problem with relatively little fuss.”

How LDB can help

Mr Dubois said there could be serious consequences to both the company and to shareholders if the Division 7A rules were not adhered to.

“The amount of the loan (will be) treated as a deemed dividend to the shareholder, but they won’t get the benefit of any franking credits, and the company gets their franking credits stripped away,” he said.

“There are negative consequences to everyone involved if a Division 7A loan is not treated properly.”

To make sure you remain compliant, please get in touch with LDB by calling (03) 9875 2900 or filling in the contact form below.