Division 7A of the ITAA 1936 has applied to loans made by private companies to their shareholders (and associates of the shareholders) since 4 December 1997. The provisions are automatically triggered if the conditions of the Act are met.
The punitive nature of Division 7A was seen as disproportionate to the mischief targeted, as the deemed dividend dictated by the Act was not only unfranked (therefore exposing the recipient to tax at full marginal rates), but the paying company would also lose the franking credits that would otherwise have attached to the dividend. Where the provisions were triggered as a consequence of an honest mistake or inadvertent omission by the taxpayer, this was seen as being particularly harsh.
Recently, sub-division DB was introduced into Division 7A. The effect of this was to provide the Commissioner a discretion to determine that there should either not be a deemed dividend or such a dividend should be frankable. The automatic debiting of the company’s franking account has been removed. The new rules also clarify the interaction between Division 7A loans and FBT and remove the residual application of section 108 to loans that were entered into after 4 December 1997.
Time To ‘Fix It’
The ATO recently released Practice Statement PS LA 2007/20 to outline how the Commissioner will deal with the changes. The Commissioner is providing a ‘once off’ chance for taxpayers to take ‘corrective action’ and fix prior mistakes regarding Division 7A prior to 30 June 2008.
For loans, ‘corrective action’ means:
- Ensuring loans are in place; and
- That a payment (or payments) equal to the total of the minimum yearly payments for the life of the loan has been made. This payment can be made in the 2007-2008 year and does not require the taxpayer to amend prior year returns.
There are of course other forms of corrective action for payments or trust amounts that were subject to Division 7A. To take advantage of this concession by the ATO, taxpayers must ensure that:
- The failure to comply with Division 7A was a result of an ‘honest mistake’ or ‘inadvertent omission’ by the taxpayer, the private company or some other entity;
- Corrective action has been taken by 30 June 2008;
- The deemed dividend arose (or should have) as a result of a transaction occurring after 30 June 2001; and
- The taxpayer has lodged all required income tax returns for the 2001-02 to 2006-07 income years.
If you think you are in a position where this concession can make you breath a little easier, then contact your Moore Stephens tax advisor for assistance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
