Company loans to shareholders under review

The Government has released a consultation paper outlining proposed reforms to ‘simplify’ the loan agreements that are generally required when a shareholder (or their associate) borrows funds (or receives a payment) from a related company.

To avoid this, many shareholders enter into complying ‘Division 7A loan agreements’ (basically agreeing to repay the relevant amount within 7 years, or 25 years if the loan is secured). With this in mind,Treasury is currently looking at (amongst other things):

  • simplifying the Division 7A loan rules by converting to a new 10-year model; and
  • clarifying that distributions from a trust to a ‘bucket’ company that remain ‘unpaid present entitlements’ come within the scope of Division 7A.

The proposed amendments are intended to apply from 1 July 2019 onward and will be the most significant tax reforms impacting business and investments clients over the next 2 years.

Government is currently considering submissions made with respect to these proposals and it is expected that draft legislation, and further clarity, will be available early in the 2019 calendar year.