Targeted Amendments to Division 7A

This submission was originally published on 21 November 2018.

On 21 November 2018 BDO lodged a response to the Treasury Consultation Paper on Targeted Amendments to Division 7A released on 22 October 2018.

The main issues identified in the BDO submission are summarised as below:

  • The exclusion of commercial loans under section 109M should be widened so that Division 7A does not apply to loans on a commercial arm’s length basis made to shareholders or associates for business or other income production reasons.
  • The existing benchmark interest rate for 25 year secured loans should be retained until 30 June 2021.
  • Clarification is required with respect to Division 7A treatment of shareholders and associates of foreign companies, in relation to the source rules, double tax agreements and section 47A.
  • The concept of distributable surplus should not be removed but changed to clarify Division 7A does not apply if the only funds in the company are share capital or borrowed funds.
  • Pre 16 December 2009 UPEs should not be brought into Division 7A but if they are, generous transitional arrangement should be provided recognising the difficulty there may be in reorganising these arrangements.
  • There is no need for the 14 year review period. The ATO can already extend the review period where there is tax evasion.
  • The Board of Taxation’s recommendations that the taxation of business income should be at the concessional corporate rate, regardless of entity, should be reconsidered at least in relation to trusts as outlined in the Board’s recommendations.

Detailed BDO comments on the discussion questions in the Consultation Paper are in the appendix to the BDO submission. All legislative references in the submission refer to the Income Tax Assessment Act 1936 unless otherwise indicated.