Division 7A of the Income Tax Assessment Act 1936 deems loans to shareholders to be dividends received by the shareholders unless the loans comply with strict rules concerning interest rates, term, minimum annual repayments and security.

On 5 June 2009 the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced the release of a Treasury discussion paper entitled “Improving fairness and integrity in the Tax System – Tightening the non-commercial loan rules in Division 7A of the Income Tax Assessment Act 1936“.

On 12 May 2009, as part of the 2009-10 Budget, the Treasurer and the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced that the Government would tighten the non-commercial loan rules in Division 7A of the Income Tax Assessment Act 1936 to prevent shareholders and their associates avoiding tax on distributions and benefits they receive from private companies. The measure has effect from 1 July 2009. The media release is available on the Treasurer’s website (media release No. 067 of 2009).

On aspect to be reviewed is the of company assets by shareholders (or their associates).

The measure addresses concerns that individuals can avoid tax on non-dividend distributions when a private company allows its shareholders or their associates to use company assets such as real estate, cars and boats for free or at less than their arm’s length value. The Government is tightening the operation of Division 7A, so that this loophole can no longer be exploited. There will be a carve-out for minor and infrequent use of company assets.

The government has invited comments and submissions until 3 July 2009.