Contact: David Prichard; ESV (New South Wales, Australia)
As if running your own business is not complicated enough, the funding of associated ventures and extraction of funds from the family business is fraught with damage due to the application of deemed dividend rules known as Division 7A.
In its infancy Division 7A was enacted to catch the straightforward position of shareholders (or associates) taking loans from the family company rather than paying a dividend, thus capping the tax paid on the funds at the respective company rate (currently 30%). However, over the years various strategies have been developed to circumvent the rules with a subsequent patchwork of guidelines and legislative changes leaving a highly complex set of rules. The rules now catch commercial transactions in circumstances that were not originally intended and are actually impeding genuine business growth and funding.
As a result, a further review is underway with a report due by the end of October 2014 following the Board of Taxation March 2014 discussion paper. Whilst a number of issues were considered in the paper, the options outlined in the paper are seeking simplicity and certainty for advisers and businesses.
The recommendations to emerge in October may or may not be enacted and may or may not reflect the ideas of the discussion paper, however, based on the paper the most probable position is that the various loan types (7 and 25 years principle and interest, 10 years interest only) together with the complexity around unpaid present entitlements (UPE) will be resolved. The likelihood is that a simplified 10 year loan will be available with a streamlined repayment schedule, known interest rate and various check in points.
