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Resolution to problematic issues of Division 7A welcomed by industry leader
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Following more than 18 months of lobbying the Federal Government for legislative solutions to problems relating to Division 7A* , The Institute of Chartered Accountants in Australia, today welcomed the Government’s action to address these concerns.  
 
In a nutshell, the announcement facilitates a more targeted approach to tackling the issues whilst limiting the harsh and unintended consequences that private companies and their shareholders have been facing under the current legislation. 
 
Tax Counsel for the Institute of Chartered Accountants in Australia, Ali Noroozi said that following extensive consultation with the office of the Minister for Revenue and Assistant Treasurer as well as the Department of Treasury, the Institute is pleased with the outcomes including: 
 

  • The removal of the double penalty nature of Division 7A;
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  • The insertion of legislative discretion, allowing the Commissioner to disregard deemed dividends that would otherwise arise, broadly, in circumstances where it would be equitable to do so;
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  • The repeal of Section 108* , which now guarantees that there is one uniform set of provisions, namely Division 7A dealing with this area of Australian taxation law; and
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  • The simplification of the interaction of Division 7a with FBT.
 
Whilst the majority of the proposed changes take effect from 1 July 2006, the discretion of the Commissioner applies from 1 July 2002 and the FBT amendments will apply from 1 April 2007.  
 
“It is significant that the Commissioner will be able to exercise such a discretion with respect to a number of prior years. It will provide much needed relief to those taxpayers who may have inadvertently fallen within the ambit of Division 7A and have become exposed to its harsh consequences,” Mr Noroozi said. 
 
“Following today’s announcement, Division 7A is now better targeted to limit the inequitable and unintended consequences that once severely impacted private companies and their shareholders, who can now breathe easier,” he said.  
 
In early 2005, the Institute was involved in extensive consultation with its members to identify the issues arising in the application of Division 7A. The outcome of the consultation was two submissions: one to the Australian Tax Office (ATO) identifying issues that could be addressed administratively and another to the Minister of Revenue and Assistant Treasurer highlighting issues that the Institute believed required legislative resolution. 
 
“The Minister’s Office and the Department of Treasury have been very cooperative and consultative in reviewing Division 7A and once again the Institute is pleased to have taken a lead role in identifying issues with the application of Division 7A and working with the government to amend those inequities,” Mr Noroozi said. 
 
“The ATO is also taking steps to overcome the administrative issues identified in our submission to them. To date, there has been good progress and we look forward to a speedy resolution of these issues as well,” he said. 
 
*Division 7A of the Income Tax Assessment Act 1936 (1936 Act) ensures that all loans and payments by private companies to shareholders or associates of shareholders, in the absence of a specified exclusion, are treated as assessable dividends to the extent that there are realised or unrealised profits in the company. The provisions may also capture debts owed by shareholders or their associates that are forgiven by private companies. 
 
*Division 7A was introduced to overcome deficiencies in its predecessor, section 108 of the 1936 Act. However, until now, section 108 has not been repealed and practitioners were expected consider the potential application of both this provision and those of Division 7A to any loans, payments and the forgiveness of debts by private companies, particularly given that some of the exceptions in Division 7A such as that for inter-company payments or loans, were not replicated under section 108.