In: Accounting
You are required to prepare a written research assignment that
addresses one of the provided topics
below. The purpose of the task is for you to demonstrate high-level
critical reflection and analytical
reasoning skills in the context of the application of Australian
taxation law and taxation law policy. You
must undertake academic research which demonstrates the
following:
1. An in-depth your understanding of how the specific tax law
applies,
2. The policy context of the law and if relevant how other
jurisdictions deal with similar issues,
3. Critical reflection as to whether the law achieves its stated
purpose aligns with principles of
good tax policy or could be improved/amended. These critical
reflections should be
supported by the research you have undertaken as well as your own
independent thought.
TOPIC:
Division 7A (treatment of private company loans) -
discuss and critically evaluate Division 7A
as a specific anti-avoidance provision. You should include a
discussion of the overall policy
objectives and your evaluation of whether the Division currently
meets these objectives or
whether further amendments are necessary.
International Tax Avoidance has become a growing phenomenon for the Multi National Corporations who are paying next to nothing taxes and basically shifting their taxable income to the other rtax safe heaven countries. This leads to tax avoidance but more than that the countries that need to tax these transactions for their domestic benefit are unable to tax them and benefit their general public.
If Div 7A applies, amounts paid, lent or forgiven by a private company to a shareholder or their associate are treated as deemed unfranked dividends, unless certain exclusions apply. The main exclusions are that the loan is repaid or put on a complying Div 7A loan agreement before the lodgement date or due date for lodgement (whichever is earlier) of the income tax return for the year in which the loan was made. Note that if a Div 7A loan option is used, then annual principle and interest repayments will be required moving forward.
So to avoid a deemed unfranked dividend arising under Div 7A, one of the crucial elements to understand is what is specifically excluded from being treated as a “repayment” for the purposes of Div 7A. This is specifically dealt with under s.109R, titled “Some payments relating to loans not taken into account”.
The general purpose of s.109R is to prevent arrangements to
avoid the application of Div 7A to loans that involve repaying
them, where there is an intention of re-lending the funds to the
taxpayer.
In summary, a repayment must be disregarded for the purposes of Div
7A if a “reasonable person” would conclude that:
1. Having regard to all of the circumstances, that the shareholder
or shareholders associate intended to obtain a loan or loans from
the private company of a total amount similar to or more than the
repayment required; or
2. Having regard to all of the circumstances, if a new loan or
loans was made to the shareholder or shareholders associate before
he or she makes the repayment to the private company and the loan
or loans were obtained in order to make the repayment.
The Commissioner does not have discretion here. If the
“reasonable person” test concludes that the payment is disregarded,
a Div 7A deemed dividend will arise. Now, there are some exceptions
to s.109R, including where repayments are (note this list is not
exhaustive):
1. “Set off” against a dividend payable by the private company, or
salary, wages and other kinds of payments subject to PAYG
withholding ; or
2. An amount paid to the private company by a third party on behalf
of the shareholder or shareholders associate where the amount is
assessable income of the borrower in the income year in which it is
made or in an earlier year (for example you direct a debtor to make
a payment directly to the private company rather than to you
personally).
If you are currently dealing with a Div 7A loan, please keep in mind that there are not only requirements surrounding WHEN the loan must be repaid, but also HOW the repayment is made. Don’t inadvertently trigger a deemed unfranked dividend just because you were not aware of that your payment would be considered an “excluded repayment”!
So where to from here:
If you are a shareholder or shareholders associate and you have borrowed an amount from a private company, consider the application of Div 7A;Consider when the payment or loan needs to be repaid to the private company, so as to avoid a deemed unfranked dividend arising;Just as important, discuss with your tax advisor and confirm that the repayment you make will not be an excluded repayment for the purposes of Div 7A!