I am announcing today additional amendments to proposed Division 7A of the Income Tax Assessment Act 1936 which was introduced into the House of Representatives in Taxation Laws Amendment Bill (No.7) 1997 on 4 December 1997.
The new Division 7A is intended to ensure that payments, loans, or debts forgiven by private companies to shareholders (and associates of shareholders) are treated as assessable dividends to the extent that there are realised or unrealised profits in the company (unless they come within specified exclusions).
On 9 March 1998 I announced the Government's intention to amend the Bill to ensure that the proposed legislation will not apply to payments by private companies to, or on behalf of, shareholders in their capacity as employees. I also announced that the Government was considering representations received on other aspects of the proposed legislation. In response to those representations the Government will make further amendments to the proposed legislation to ensure that the provisions operate as intended.
Accordingly, the following amendments (which are attached to this press release) will be moved when the Bill is debated in the House of Representatives.
Loan guarantees: The proposed legislation currently provides that, where a private company guarantees a loan made by a third party to a shareholder (or their associate), the amount of the loan will be treated as a dividend. The proposed guarantee provision may have unintended consequences. Accordingly, it will be amended so that, generally, the mere provision of a guarantee will not result in a deemed dividend. Rather, the creation of a liability to make a payment upon default under a guarantee will be the triggering event for a deemed dividend.
In addition, the guarantee provisions will be amended to give a discretion to the Commissioner of Taxation to exclude an amount treated as a dividend as a result of a liability arising under a guarantee if it would cause undue hardship to the shareholder (or associate). This will allow the Commissioner a discretion in circumstances where, for example, a shareholder is financially unable to meet loan repayments through no fault of their own, or where a shareholder technically defaults under a loan agreement by failing to make a payment by the due date, but makes that payment within a short period of time thereafter.
If a guarantee is provided by a private company as part of an arrangement involving, either directly or indirectly, a payment or loan to a shareholder of that company (or their associate) by another company, the loan will be treated as a payment to the shareholder (or associate) to the extent that the payment or loan made to the shareholder (or associate) by an interposed company exceeds the interposed companys distributable surplus. This will ensure that Division 7A cannot be avoided by a profitable company guaranteeing a loan to an interposed company with no profits simply to allow that company to make a payment or loan to a shareholder (or their associate).
Guarantee for the purposes of Division 7A will be defined to include the provision of security. This is to ensure that the provisions cannot be circumvented merely by providing security for a loan rather than a guarantee.
Loans for employee share scheme purchases: The proposed legislation will be amended so that loans made solely for the purpose of allowing a shareholder or associate of a shareholder to acquire qualifying shares or qualifying rights in the company under an employee share scheme, to which Division 13A of the Income Tax Assessment Act applies, will not be treated as dividends.
Distributions by liquidators and winding up loans: The proposed legislation may have the effect of treating payments by liquidators, or loans made during the winding-up of a private company, as dividends. The legislation will be amended so that liquidators distributions will not be treated as dividends. The legislation will also be amended so that loans made during the course of winding-up a company will not be treated as dividends to the extent that they are either repaid or offset by a distribution by the end of the year of income following the year in which the loan is made.
Trust distributions to corporate beneficiaries: It has been argued that the proposed legislation does not apply to arrangements where a corporate beneficiary has become presently entitled to net income of a trust and the amount is not paid by the trustee to the corporate beneficiary, but continues to be held by the trustee who then provides a loan to a shareholder (or their associate) of the corporate beneficiary. These sorts of arrangements should be caught by Division 7A because, in substance, a loan of money from the private company to the shareholder (or their associate) has been effected via the trust. The proposed legislation will be amended to deal with this situation.
Amounts that are not otherwise assessable treated as dividends: The proposed legislation ensures that where a payment or loan would be included in the assessable income of a shareholder (or their associate), it will not be treated as a deemed dividend under Division 7A. It is also possible that a payment or loan made to a shareholder (or their associate) will be specifically excluded from their assessable income by virtue of an exempting provision in the income tax law. The proposed legislation will be amended to ensure that such a payment or loan will not be treated as a dividend under Division 7A.
Written loan agreements: The proposed legislation currently provides that a loan satisfying maximum term and minimum interest rate criteria will not be treated as a dividend if there is a written agreement in place before any amount is advanced to the shareholder (or their associate). The proposed legislation will be amended so that the requirement for the written agreement to be in place before the loan is made will be regarded as satisfied if the written agreement is put in place by 30 June 1998. This measure will apply only for loans made during the companys 1997-98 year of income.
The Government also intends to make some other minor changes to the legislation. These will clarify the operation of certain provisions and assist taxpayer compliance.
The additional amendments, with the exception of the changes to the treatment of loan guarantees and trust distributions to corporate beneficiaries, will commence on 4 December 1997, the same commencement date as for the rest of Division 7A. The amendments in respect of loan guarantees and trust distributions will apply to loan guarantees and trust distributions made after 4.00 pm AEST on 27 March 1998.
27 March 1998
Canberra
Contact:
Penny Farnsworth
Assistant Treasurers Office
Telephone: (02) 6277 7360
Mobile: 0419 482497
Robert Puckridge
Australian Taxation Office
Telephone: (02) 6216 1486 [bh]
(02) 6247 2093 [ah]