Deloitte welcomes Division 7A changes as making economic sense for business


27 March 2014: The recently released discussion paper about the Review of Division 7A which outlines a policy framework directed at achieving efficiency, simplicity and equity, has been welcomed by professional services firm Deloitte.

The recommended reforms to Division 7A are about maximising simplicity by reducing the compliance cost burden on business.

Keith Hardy, Deloitte Private Lead Tax Partner noted that the Board’s stated aim to assist private businesses, without sacrificing the progressivity of the personal tax system, was achieved.

“A balance has been met by ensuring the use of company profits attracts tax at the user’s or recipient’s progressive personal income tax rate and through the  removal of impediments for the small and medium enterprise (SME) sector to reinvest business income as working capital,” said Mr Hardy. “Also no advantage is given to accumulating passive investments over the reinvestment of business profits in active business activities.”

The Discussion Paper outlines five key principles that the Board recommends.

If accepted, the recommended changes should simplify some of the more difficult and or controversial areas currently embodied in Division 7A.  

Essentially, the Board of Taxation’s recommendations are aimed at striking the right balance between shareholders using business profits to fund lifestyle or other passive investments without paying any top up tax, and enabling business operators to reinvest profits that are capped at the corporate rate of tax back into their business.

“The Board intends that business operators in the SME sector are to be the main beneficiaries of the Board’s recommendations,” added Mr Hardy.  

The Discussion Paper outlines five key principles that the Board recommends.

  • A set of common rules that would, as far as possible, equate the private use of assets by shareholders (or their associates) to the treatment of loans;
  • A new method for calculating the distributable surplus which should both simplify compliance and address certain issues that can currently lead to double taxation;
  • A new, simplified regime to replace the existing provisions relating to complying loans;
  • A limited exclusion from the application of Division 7A to unpaid present entitlements (UPEs) owed by trusts that nominate to ‘tick the box’ and forgo access to the CGT discount on disposal of assets; and
  • A mechanism to allow taxpayers to self correct mistakes or omissions without having to apply to the Commissioner for the exercise of his discretion.

“From a SME perspective, the option for trading trusts to carve out UPE’s from Division 7A is unquestionably the flagship of the Board’s recommendations. The most pressing issue now will be how the transitional provisions will cater for existing UPEs that are effectively locked into  seven or ten year safe harbour sub-trust arrangements which are currently prescribed by the ATO,” observed Mr Hardy.

“We might see some transitional measures operating for the next 25 years simply because people are already locked into the secured loan arrangements. So a simplified Division 7A won’t happen overnight.

“The devil will be in the detail and we need to wait and see if these simple and sensible frameworks are implemented, as the benefits for private businesses will be profound,” concluded Mr Hardy.


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