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Company loans to shareholders under review (Div7A loans)

The Government has released a consultation paper outlining proposed reforms to ‘simplify’ the loan agreements that are generally required when a shareholder (or their associate) borrows funds (or receives a payment) from a related company.

Broadly, where a private company makes a payment or loans funds to a shareholder and/or their associate, the amount will be treated as a taxable unfranked dividend paid to the recipient.

To avoid this, many shareholders enter into complying ‘Division 7A loan agreements’ (basically agreeing to repay the relevant amount within 7 years, or 25 years if the loan is secured). The Div7A is a tax integrity measure, designed to ensure that certain taxpayers (meaning shareholders of private companies and their associates), cannot directly access funds taxed only at the company tax rate.

With this in mind, Treasury is currently looking at (amongst other things):

–    simplifying the Division 7A loan rules by converting to a new 10-year model; and

–    clarifying that distributions from a trust to a ‘bucket’ company that remain ‘unpaid present entitlements’ come within the scope of Division 7A.

– annual benchmark interest rate will be the Small business variable overdraft indicator lending rate (higher than current rate used)

-They will remove the concept of distributable surplus

The proposed amendments are intended to apply from 1 July 2019 and will arguably be the most significant tax reforms impacting business and investment clients over the next two years.

At this stage of the consultation process, the Government is currently considering submissions made with respect to these proposals and it is expected that draft legislation, and further clarity, will be available early in the 2019 calendar year. 

What does this mean for you?

If you finally managed to understand current rules, these will change but only slightly and they seem to be more restricting.

What remains the same though is the fact that when taking money out of the company (other than via salary), you need to consider tax consequences.

It is best if you book yourself for a tax planning meeting and discuss this with your accountant.

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