As members have told me consistently, Division 7A has been a bugbear almost since its introduction into Parliament in 1997. As with many well-intentioned integrity measures, the ensuing years have resulted in ongoing tinkering and a continual game of catch-up. The result is our current Division 7A, which is riddled with significant complexity, unintended consequences and inappropriate or punitive application.
We welcomed the Assistant Treasurer’s announcement at our Annual NSW Tax Forum last year, that the Board of Taxation would be undertaking a post-implementation review into Division 7A. You can view our submission in response to the Board’s Discussion Paper.
In our submission we note that the underlying policy rationale of an integrity measure such as Division 7A remains relevant in our tax system of differing marginal tax rates. In order to fulfil this policy rationale, the operation of Division 7A should be restricted to the identified mischief. That is, only profits that are paid, loaned or in relation to which a debt is forgiven that are used for private purposes should be caught within the ambit of Division 7A.
On this basis, we have recommended that in addition to technical amendments that will simplify the current rules, the Board should consider recommending that the operation of Division 7A be restricted by way of a thorough examination of the Statutory Interest Model (please refer to our submission).
Of course, regardless of which model for reform is ultimately adopted, the unpaid present entitlements issue and narrow operation of the current Commissioner’s discretion will need to be adjudicated upon by the Board of Taxation and then the Government. If unpaid present entitlements were intended to be caught within Division 7A, the law should be amended to clearly prescribe such an outcome.
We look forward to the Government’s release of the Board’s final report in coming months.
Robert Jeremenko CTA is Senior Tax Counsel of The Tax Institute.
The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.