Australia: Proposed changes to the tax monster that is Division 7A

Submissions to Treasury

Submissions have now closed to Treasury concerning their Consultation Paper "Targeted Amendments to Div. 7A Integrity Rules" (October 2018 – Consultation Paper).

Whilst it is hoped that the submissions to Treasury may finally provide some worthwhile improvements to Div. 7A, the fact that this whole process started in May 2012, and as of today, the limited proposed amendments still lack the required detail, there is little doubt that the monster Div. 7A has turned into, is not about to be constrained.

Div 7A replacement to s108 in 1997

When Div. 7A was introduced in 1997 to replace section 108, dealing with the release of private company profits to shareholders (or associate of shareholders), they seemed to be largely sensible measures that would allow a taxpayer to self-assess whether they had a deemed dividend, rather than the Commissioner having to form an opinion that there had been a release of profits before section 108 applied.

50% CGT discount in 1999

The introduction in 1999 of a choice for individuals and trusts (with presently entitled beneficiaries) to elect to take a 50% discount on capital gains (in place of indexation), created a bias in favour of appreciating capital assets being held in trusts rather than companies.

UPEs to fund trust trading

This together with the fact that many private enterprises preferred trusts as their trading and asset holding entities, rather than companies, put together with a desire to access the lower corporate rate (30%), led trusts to make corporate beneficiaries presently entitled to trust income, but the entitlement was not paid out (an Unpaid Present Entitlement-UPE). This method obtained the corporate tax rate, but allowed for the ongoing funding of the business activities of the trust.

ATO U-turn on UPEs

In December 2009, alarmed by these developments, the ATO changed its position in relation to UPEs owed by trusts to companies, and argued that the allowing of the UPE to remain outstanding represented a "financial accommodation", to be within the extended definition of "loan" in section 109D of Div. 7A. This was a U-turn, which was met with considerable dismay resulting in the ATO proposing some ameliorating measures to soften the blow of their change of position (TR 2010/3 & PSLA 2010/4). As a result of this turmoil, in May 2012, the Government commissioned the Board of Taxation to undertake a "Post-implementation review of Div. 7A".

Board of Taxation

The Board's First Discussion Paper was released in December 2012. In November 2013 the terms of reference were extended to include consideration of Div. 7A in the context of the broader tax framework, a Second Discussion Paper was released in March 2014. The Board then provided its Final Report to Government in November 2014.

The Board's Final Report made far reaching recommendations in relation to the operation of Div. 7A.

Government's response

The Government's response to the Board's Final Report was to announce, with very little detail, relatively modest amendments as part of the 2016/17 budget, to apply from 1 July 2018:

  • A self-correction mechanism to assist taxpayers to rectify "breaches of Div. 7A promptly".
  • Appropriate safe harbour rules to provide certainty and simplify compliance for taxpayers.
  • Simplified rules regarding complying Div. 7A loans, including in relation loan duration and the maximum interest rate.
  • A number of technical amendments to improve the integrity of the operation of Div. 7A, and to provide increased certainty for taxpayers.

In the 2018/19 Budget, the Government announced that it was deferring the start date of the 2016/17 proposed amendments, and in addition, confirmed that UPEs would come within the scope of Div. 7A (rather than be administratively treated as such).

All amendments were specified to take effect from 1 July 2019.

Treasury consultation

Treasury released a Consultation Paper on 22 October 2018 posing, in reality, some 22 issues upon which they wanted to hear from stakeholders.

Distributable surplus

Some of Treasury's consultation points are indeed alarming as they do not go into the detail of seeking to implement the Board's recommendations in its Final Report, but rather, propose the complete opposite. For example, the Board recommended that the concept of "distributable surplus" be maintained, but Treasury proposes to abolish it! This would mean that capitalising up a private company with $1M, and then borrowing the money straight out again would give a $1M deemed dividend. This is outrageous.

Pre-Dec 2009 UPEs

On the other hand, the Board recommended that pre-December 2009 UPEs be brought into Div. 7A, whereas Treasury asked the question of whether they should be, without any discussion. The 2018/19 Budget certainly made it clear that future UPEs would necessarily come within the scope of Div 7A.

Submissions to Treasury have made it clear that bringing pre-December 2009 UPEs into Div 7A would be a highly retrospective amendment and cause affected taxpayers considerable hardship.

10 Year Loan Model

Other measures upon which Treasury are consulting are a proposed 10-year Loan Model to replace the existing unsecured 7-year and secured 25-year loan arrangements, and rejecting the Amortisation Model recommended by the Board. The Amortisation Model proposed by the Board contemplated flexibilities to the payments of both interest and principal, with minimum payments of interest and the principal not required annually, but rather at the end of years 3, 5, 8 and 10. The Amortisation Model had garnered broad support as it represents an appropriate balance of flexibility for borrowers in terms of cash flow management and the need to ensure, from a policy perspective, that regular payments of both principal and interest are made to the company lender.

No "Business Income Election"

The Board has also recommended that if the Amortisation Model was adopted, trusts should be allowed to make a once and for all election for loans from companies (including UPEs owed to companies), to be excluded from the operation of Div. 7A (the "Business Income Election"). The Treasury Consultation Paper does not refer to the Business Income Election, which is also disappointing.

Start Date

Whether the 1 July 2019 start date can be relied on, needs to take into account that the Federal Election must be held by May 2019, with the Government having scheduled only 10 sitting days before it anticipates going into caretaker mode, so that no new legislation will be introduced from the date of the announcement of the election. Further, that the next Budget has been brought forward to April 2019, which may result in further changes to the proposed amendments.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions