The Government has released its new framework for taxing private company loans which will create significant cash flow and tax costs for private business in a once in ten year bonanza for accountants.
The new rules deal with “Division 7A”, which currently deems private company loans to individuals and trusts to be unfranked dividends unless the loan is documented as a complying 7 or 25 year loan that is subject to regulated interest and principal repayments, or if it’s an old pre-1997 loan.
The new framework requires a recalibration of the majority of existing private company loans, which could number hundreds of thousands across the economy. Existing 7 year loans will be subject to a big interest rate hike from next year, whereas 25 year and pre-97 loans will be cut down to 10 years in 2 years’ time and subject to an acceleration of principal repayments as well as a significant hike in the interest rate. Any new loans will have a 10 year term, with the accelerated principal repayments as well as the higher interest rate.
In simple terms, many private businesses will have an increased tax payable across the medium to longer term and need to urgently review their funding structures and determine how to optimise their tax structure. It’s important that they take a considered strategic approach, which will be challenging where accountants struggle to deal with the sheer breadth of the changes, albeit they shouldn’t have trouble dealing with their fee targets.
It seems incredible the current Government would be administering a tax and fee hike to private business at this time, more so given the changes have had a gestation period of 6 years! It would have been far easier to allow existing Division 7A loans to run out their course, and soften the sting of the interest rate hike.
Another beneficiary of the changes, as well as the accountants, are the “UPE” category of loans which are owed by trusts in the form of distributions to corporate beneficiaries that remain unpaid. This lucky group of borrowers were given the benefit of 10 year interest free treatment on loans going back to 2009, so many of them are shortly due to be repaid. It seems these borrowers can now simply roll over for another 10 years, albeit under a relatively penal structure.
It remains to be seen if the rollover benefit for the “UPE” borrowers survives the inevitable debate and potential compromise, given the hike being imposed more generally across the sector.