Board of Taxation to Conduct a Post-Implementation Review of Division 7A
The Gillard Government has tasked the Board of Taxation with undertaking a post‑implementation review of Division 7A of Part III of the Income Tax Assessment Act 1936.
This post‑implementation review provides an opportunity to examine the effectiveness of this important area of the tax law which has now been in operation for over a decade.
Division 7A plays an important role in ensuring that the profits of private companies are not paid to shareholders (or their associates) without being subject to the appropriate rate of tax.
Since its introduction in 1997, Division 7A has been subject to numerous amendments to ensure the Division operates as intended.
However, these amendments have increased its complexity and arguably led to unintended consequences.
Last year's successful Tax Forum raised Division 7A as a particularly thorny issue for small business - especially for users of trusts that need working capital to reinvest in their business.
This post-implementation review will examine whether there are options to simplify this complex area of the law, while still ensuring the integrity and fairness of the tax system.
The Board will conduct the review in line with the attached terms of reference and provide the Government with a final report by 30 June 2013.
18 May 2012
Terms of reference
Post-implmentation Review of Division 7A of Part III of the Income Tax Assessment Act 1936
- The Board of Taxation (Board) is requested to undertake a post‑implementation review of Division 7A of Part III of the Income Tax Assessment Act 1936 (Division 7A).
- Division 7A contains integrity provisions designed to prevent shareholders (or their associates) of private companies from inappropriately accessing the profits of those companies in the form of payments, loans or debt forgiveness transactions. Within this context the Board should:
- examine whether Division 7A gives effect to this policy intent;
- examine whether there are any problems with the current operation of Division 7A, including its interaction with other areas of the tax law, that are producing unintended outcomes or disproportionate compliance and administration costs; and
- to the extent that there are problems, recommend options for resolving them so that, having regard to the policy intent of Division 7A and potential compliance and administration costs, the tax law operates effectively.
- The Board should also examine the potential for broader reforms to Division 7A, including whether the provisions could be expressed in a clearer and simpler manner. Any reforms will need to maintain the integrity of the tax law and revenue neutral or near revenue neutral outcomes.
- The Board may wish to conduct this review in stages due to the possible interactions with the Government's update and rewrite of the trust income tax provisions.
- The Treasury is to regularly inform the Board of the progress and outcomes of the update and rewrite of the trust income tax provisions, especially in relation to unpaid present entitlements.