Use of company assets to be deemed dividends

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.

ASIC releases financial hardship report

ASIC, in conjunction with Consumer Affairs Victoria (CAV), has released a report examining how lenders and mortgage brokers respond to borrowers experiencing financial difficulties.

The report, Helping home borrowers in financial hardship (REP 152), found that while some lenders are responding well to the needs of their customers, there is generally room for improvement and provides guidance to industry on how to improve practices.

‘This report highlights the importance of industry taking an active role in dealing with hardship’, said ASIC’s Senior Executive Leader, Deposit Takers, Credit and Insurance Providers, Mr Greg Kirk.

‘With forecasts of growing unemployment, we can expect to see increasing numbers of borrowers experiencing mortgage stress. In many cases, however, financial difficulties will be temporary, allowing problems that arise to be resolved.’

‘It’s important that lenders and intermediaries have processes and procedures in place to provide constructive responses to financial hardship. These include procedures to identify customers in hardship, to provide clear and timely information to customers on their right to seek relief, and to engage sufficiently with a customer’s circumstances in order to provide appropriate and flexible assistance’, said Mr Kirk.

The report found that:

  • Information about financial hardship is usually only provided following payment default, making it very difficult for borrowers to take positive action at an early stage. Equally concerning, this information is often insufficient for borrowers to understand their options and make informed choices;
  • Some lenders do very little to identify borrowers who may require hardship assistance. Many lenders leave this identification of need to collection officers who may not be trained for the purpose eg. one lender only identifies hardship where the borrower raises the need for assistance themselves;
  • Lenders appear to prefer offering short-term assistance, such as a three month payment moratorium, rather than genuinely engaging with, and responding to, a borrower’s specific situation. For example, a home loan borrower who has lost income through reduced overtime may need their loan to be extended with lower repayments over a longer period. In such circumstances, a short moratorium is a very temporary fix leaving the borrower likely to default when repayments resume;
  • Some lenders have adopted policies that are inconsistent with the rights and remedies available to borrowers under the Uniform Consumer Credit Code. For example, by refusing hardship assistance once payments are more than 60 days overdue or limiting any variation in repayments to a maximum period of six months; and
  • Despite clear industry standards mortgage brokers generally have a limited understanding of their role in responding to financial hardship. While most brokers say they offer assistance, there is little evidence of formal policies and procedures to ensure it is done effectively or constructively.

‘This report examined industry practices as at late 2008 and there are already moves within some sectors to improve. On 5 April 2009, the Federal Treasurer announced an agreement with the four major banks wherein they commit to assist borrowers who are experiencing financial difficulty as a result of the global recession’, Mr Kirk said.

‘ASIC is confident industry will welcome the guidance provided by the report, and we’ll continue to work with them to promote better outcomes for borrowers.’

Helping home borrowers in financial hardship’ also provides guidance for borrowers. Further information for borrowers is also available on ASIC’s consumer website, FIDO, at

Victorian borrowers are also encouraged to visit the Consumer Affairs Victoria website ( for publications that can assist them in dealing with their credit providers. These publications explain the rights and responsibilities of both lenders and borrowers in Victoria.

New home buyers still borrowing to their limit

There was much joy among residential lenders in January as they celebrated droves of first home buyers returning to the residential property market.

First home buyers also appear unafraid of loading up with cheap debt – combining the carrot of the Government grant and lower interest rates to push the average first loan up 7 per cent for the quarter.

The latest Australian Bureau of Statistics figures, for the quarter ending November 2008, show the average first time home loan jumping $18,100 to $269,200.

This suggests that first home buyers are ‘stretching’ themselves and not necessarily reducing the amount required to borrow as rates fall.

In fact, first home buyers are taking a punt Australian official interest rates continuing to fall from 4.25 per cent, which seems likely in the short term with March and June 90 day bank bill futures contracts below three per cent.

This is reflected by the fact new mortgage borrowers remain heavily skewed towards variable lending, with only 2.5 per cent of the 49,383 mortgages financed in November having fixed rate terms.

This is a dramatic turnaround from the 19.3 per cent fixed average for all loans financed during the 2008 financial year. The current fixed average for FY09 is 4.4 per cent.

Overall, new home purchases financed in November 2008 (the latest Australian Bureau of Statistics housing finance data) jumped 18 per cent to 11,665, month on month, as the falling interest rate environment and the government grant encouraged new entrants.

Existing property purchasers are placing less confidence in the market, with financed loans crashing 13 per cent in November to 37,718, leaving total loans financed for the month down three per cent to 49,383.