Is it a case of goodbye Division 7A?

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On 25 March 2014, the Board of Taxation released its second discussion paper on Division 7A of Part III of the Income Tax Assessment Act 1936 (“Division 7A”).

Division 7A is an anti avoidance provision aimed at stopping tax-free distributions from private companies to their shareholders and associates, and with the ATO’s ruling on unpaid present entitlements it has also largely spelt the end of the use of “bucket” companies sitting below discretionary trusts to enable the trust to access the company tax rate.

The Board of Taxation has come to the view that Division 7A is not achieving its policy objective and is imposing compliance costs on businesses.

The discussion paper recommends significant changes to Division 7A and proposes the introduction of a new system to simplify the rules and minimise the impact on businesses when company profits are, effectively, kept within the business group, despite being distributed to a “bucket” company.  Interestingly, the Board recommends trusts be able to take advantage of the corporate tax rate via a “bucket” company, however, the quid pro quo is that the trust would be excluded from being able to access the general 50% CGT discount on most of its CGT assets, excluding goodwill.

While the paper addresses many of the family business problems associated with Division 7A, it does not specifically address the family law property settlement concerns reignited by the ATO’s recent draft ruling.  It does, however, refer to the problems associated with the current franking concession provided in family law matters.

The discussion paper is open for comment until 9 May 2014 and the version of the discussion paper can be found here.

Brendan Cockerill is a Business and Succession Lawyer at Dobinson Davey Clifford Simpson, 18 Kendall Lane, NewActon, Canberra ACT 2601 and can be contacted on (02) 6212 7600.

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