The proposed changes mean higher interest charges and shorter repayment terms on some Division 7A loans. Further, loans made prior to 4 December 1997, which have been specifically exempt from Division 7A for the past 20 years, will be captured by the new rules and need to be repaid with interest.
Division 7A generally applies when a private company loans money to it’s owners/shareholders. It also applies when a discretionary trust declares a distribution to a company, but does not physically pay this distribution. This is known as an Unpaid Present Entitlement (UPE).
If a business owner/shareholder withdraws money from their company and does not declare this as a wage or a dividend, it will likely be considered a loan from the company. This is a regular occurrence, so it’s very common for private companies to have these loans on their balance sheet.
Division 7A acts to impose minimum interest charges and a maximum loan term on these outstanding loans and UPEs. Currently, the loans must be repaid over 7 years (if unsecured) or 25 years (if secured by real property).
Repayments can be made by paying the cash back to the company, or by the company declaring a dividend for the minimum repayment amount. These dividends can be franked if franking credits are available, but top up tax will be payable if the shareholder’s marginal tax rate is higher than the company tax rate.
The major changes that the Government are proposing to implement from 1 July 2019 are as follows:
It should be noted that these changes are only proposed at this point in time. The Treasury has completed their consultation process but no legislation has been released. If enacted as proposed, the changes will have real and far reaching implications for privately owned companies. Watch this space…
Whether you would like to discuss these proposed changes or are seeking other business advice, our Chartered Accounting team is happy to assist you. Get in touch with BLG Business Advisers online or by calling (02) 4229 2211.