Division 7A – Targeted amendments
The Government has indicated it will make targeted improvements to the operation and administration of Division 7A of the ITAA 1936.
It is intended that these changes will provide clearer rules for taxpayers to assist easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A.
Division 7A is an extremely effective integrity provision designed to ensure that profits are not distributed to the owners of a company in a tax effective manner. If Division 7A is breached, the taxpayer will be deemed to have been paid a dividend out of profits on which they are taxed, but without the benefit of franking credits.
The Division 7A rules are extremely complex and lengthy, meaning the rules are not easy to understand. Mistakes can be easily made and corrective action to avoid harshness of the rules is not easy to implement. At present, if taxpayers are caught by Division 7A, their options for remedial actions are extremely limited. These generally involve treating the amount drawn from the company as a loan with minimum principal and interest repayment terms.
Taxpayers have the option of applying to the Commissioner for relief. This involves applying to the Commissioner to exercise his discretion to disregard a deemed dividend, or allow it to be franked in certain circumstances. The Commissioner’s power to do so is discretionary only, and broadly is only available where a taxpayer has made an honest mistake, or an inadvertent omission, or circumstances were beyond the taxpayer’s control and they would suffer undue hardship if the loan were treated as a dividend.
In the 2016-2017 Budget, the Government has indicated it will implement changes that may make it easier to repair an unintentional Division 7A liability. In particular, the Budget Papers indicate the Government will include the following changes to Division 7A:
- A self-correction mechanism for inadvertent breaches of Division 7A
- Appropriate safe-harbour rules to provide certainty with simplified Division 7A loan arrangements
- A number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
These changes draw on a number of recommendations from the Board of Taxation’s Post-implementation Review into Division 7A and will apply from 1 July 2018.
Measures aimed at improving the operation and administration of Division 7A will be welcomed by both private companies and their tax advisers. Division 7A is one of the most complex and problematic areas of the tax laws affecting private companies. The measures that will allow for self-correction for inadvertent breaches and safe harbour rules will provide a welcome relief from the possible harshness of Division 7A, particularly where such a liability is due to an honest and unintentional mistake.