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Australia To Improve Division 7A Tax Rules For Shareholders

Friday, October 26, 2018

The Australian Government is to simplify taxpayers' compliance with rules designed to prevent shareholders from using private company profits without paying tax at their marginal rates.

The Government is consulting on amendments aimed at improving the integrity and operation of Division 7A of the Income Tax Assessment Act 1936, which applies to shareholders of private companies and their associates. The intention is to help taxpayers comply with their Division 7A obligations by simplifying and clarifying the arrangements.

According to a Board of Taxation review published in 2014, the rules are complex, inflexible, and impose significant compliance costs on taxpayers.

The Government's discussion paper explains that, in most cases, a private company will provide benefits to shareholders through the payment of dividends or compensate them for services rendered by way of wages, director's fees, or other forms of remuneration. Division 7A does not apply to these arrangements.

However, if the company makes other payments, provides assets for private use, or loans money to shareholders, then Division 7A may apply. These amounts would be treated as unfranked dividends, which are then taxable in the hands of the recipient and therefore subject to tax at the recipient's applicable marginal rate.

In response to the Board's recommendations, the Government will simplify the Division 7A loan rules to make it easier for taxpayers to comply. The Government will also introduce a self-correction mechanism to assist taxpayers in rectifying breaches of Division 7A, along with safe harbor rules for the use of assets. It will further clarify that unpaid present entitlements come within the scope of Division 7A.

The consultation closes on November 21.