The Board of Taxation Tue 25.3.2014, released for comment a second discussion paper raising issues in accordance with the extended terms of reference given for the post-implementation review of Div 7A of Pt III of the ITAA 1936. The paper supplements the first discussion paper released in December 2012.

The Board has made some preliminary observations in relation to Div 7A including its interactions with other areas of the tax law. The Board was of the view that “in its current form, Div 7A fails in achieving its policy objectives”.

The paper outlines 5 reforms to improve the operation of Div 7A. It stated that these “reforms are intended to support growth and jobs by making the system simpler, reducing compliance costs and make it easier for small businesses to reinvest business income as working capital”. The proposed reforms outlined in the paper concern:

  • a unified set of rules based on the principle of transfers of value – this concerns a single set of common principles for dealing with loans, payments, debt forgiveness and use of company assets;
  • a better targeted framework for calculating a company’s profits – the Board suggests a simpler system in which: (i) asset revaluations will not be required and unrealised profits will not be taken to be distributed because company assets have been used; and (ii) company profits will be tested each year to appropriately tax all transactions;
  • a simpler, more flexible and better targeted system of “complying loans” – the Board suggests a single 10-year loan period with more flexible requirements for the repayment of principal;
  • greater flexibility for trusts that reinvest unpaid present entitlements (UPEs) as working capital; and
  • a self-correcting mechanism – which the Board says would enable taxpayers to put in place complying loan agreements, reduce compliance and administrative costs and substantially reduce the number of cases that would require a decision by the Commissioner.

The Board is expected to report to the Government by 31 October 2014.

COMMENTS are due by 9 May 2014.

[LTN 57, 25/3/14]