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Tax practitioners need to factor in incoming proposed changes to Division 7A during 2020 tax planning, including considering entering clients into 25-year loans to take advantage of transitional arrangements, says one law firm.
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Consider 25-year loans amid Div 7A uncertainty, says law firm
11 June 2020
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Despite the best efforts of the three professional accounting bodies, the Tax Institute and the Law Council of Australia, there has been no word yet from the government on whether proposed Division 7A changes will continue with its 1 July start date without draft legislation or further consultation.
Certainty notwithstanding, law firm Cooper Grace Ward believes tax practitioners should still consider Treasury’s 2018 consultation paper when approaching tax planning with clients this year.
In particular, special counsel Jodie Robinson believes practitioners should look at the Treasury’s transitional rules for converting existing loans to a proposed single 10-year loan model.
“In any event, under the proposed changes and the consultation paper, you still got an extra two-year period before you need to convert a 25-year loan to a 10-year loan,” Ms Robinson said.
“What are we going to advise our clients to do? At the moment, enter into a 25-year loan or convert as soon as possible if you can because these loans may be grandfathered or they may need to be converted. But even if they are converted, if you can take advantage of the proposed two-year extension period, that would be worthwhile.
“Let’s assume the new rules are only extended for another year and we’re looking at 1 July 2021, then we’ll be looking at having to convert our 25-year loans by 30 June 2023, but your higher interest rate will still kick in from 1 July 2021.”
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While the Treasury’s consultation paper made no mention of the grandfathering of 25-year loans, the Board of Taxation had specifically called for such loans to be repayable in accordance with their existing terms.
Ms Robinson believes there may still be hope for the Treasury to consider grandfathering the terms of 25-year loans.
“At least by converting to a 25-year loan, your clients have an opportunity to possibly have grandfathering and to also have the ability of the two-year grace period. If you don’t convert, then you’ve got no chance at all,” Ms Robinson said.
“It’s still possible because of the feedback on the consultation paper that the new rules may allow for grandfathering.
“The question is if grandfathering is allowed, what agreements will it cover? Is it for agreements in place when these changes were first announced, is it from when the consultation paper was released, or is it from when we get further details?”
Other Division 7A issues
The profession also continues to wait on guidance from the ATO on minimum yearly loan repayments for those affected by COVID-19.
The joint bodies had called for the ATO to announce temporary relief from minimum yearly loan repayments to alleviate the cost of Division 7A loans during the COVID-19 crisis period.
The ATO indicated last month that the commissioner “will soon be issuing further guidance”, but no timeline has been provided yet.
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