Division 7A and expert predictions on the future

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Division 7A under Australian legislation is currently concerned with private company benefits given to shareholders which are taxable under the premise of income tax purposes. For two years, the Australian government has announced that they will be making changes to the law – however, experts predict that the changes may be deferred for the third year in a row.

Despite the proposed changes to Division 7A having been set to take effect from the 1st of July 2020, the Australian government has remained silent on any potential legislation drafts and have not yet consulted accountants nor tax practitioners on the promised amendments either.

There have been non-public consultations with the Australian government on Division 7A since October 2018 and even then, tax accountants were not happy with the changes the government were planning to make and their lack of attention for the recommendations put forward by the Board of Taxation.

Since late 2018, Division 7A has been a critiqued for its complex series of legislation, causing confusion for tax experts as well as the general public. Since the Board of Taxation’s call for major changes to revamp the government’s “band-aid” fixes on the law, the government has remained largely radio silent on its intentions to fix the legislation by following the recommendations from the Board of Taxation.

Such recommendations included the removal of the concept of “distributable surplus” which more broadly refers to the realised and unrealised profits in a company. The removal of the concept was petitioned for so that a deemed dividend can arise where there are no realised profits in the company, especially in the context of corporation laws whereby dividends are no longer required to be paid out of profits.

Perhaps the government’s silence on Division 7A thus far can be interpreted in a positive light, in that the recommendations by the Board of Taxation are being taken seriously and drafts with the respected opinion of tax experts are on the way. On the flip side of things, if Division 7A were to be released as it was originally drafted in the upcoming year, tax experts believe that things will get problematic.

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