ATO, Tax

Div 7A interest must be separate

division 7a interest

A technical specialist has warned the interest charged on Division 7A loans cannot be treated as it is with other borrowing facilities under the coronavirus relief measures.

The interest charged on Division 7A loans cannot be treated in the same manner as it is with other borrowing arrangements under the COVID-19 relief provisions, a technical expert has said.

SMSF Association deputy chief executive and policy and education director Peter Burgess pointed out while the ATO has extended the time period in which an SMSF can make the required minimum repayments on these loans for the 2020 and 2021 financial years as a coronavirus relief measure, in a similar fashion to other loan facilities, the treatment of the associated interest charges for Division 7A loans remains unique.

“Importantly this relief doesn’t allow any unpaid interest to be capitalised. As we saw, the banks are capitalising interest on their commercial terms, but under this Division 7A we’re not able to capitalise the interest,” Burgess said during his presentation at the Tax Institute 2020 National Superannuation Online Conference held recently.

“So if you have a related-party loan and the lender is a private company, I think it’s prudent not to be capitalising interest to avoid any Division 7A issues.”

Further, he identified future action will be needed for the treatment of Division 7A loans with regard to the safe harbour rules outlined in the ATO’s Practical Compliance Guideline 2016/5.

“There are some other planned changes to [Division] 7A [loans] that were announced in the 2017 federal budget, so they are looking at reducing the maximum term to 10 years and increasing the interest rate,” he said.

“So where we’ve got a related-party member and it is a private company, unless we’re going to see some changes to the safe harbour parameters, there are going to be some inconsistencies I guess between the safe harbour parameters that apply to LRBAs (limited recourse borrowing arrangements) with related-party lenders and the rules and the safe harbour terms that apply under Division 7A.

“So we expect when these changes are made to Division 7A that the ATO will need to go back and amend those safe harbour parameters to ensure where the lender is a private company that we have consistency in the safe harbour terms.”

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