Accordingly, the Board is of the opinion that this model should only be pursued as part of a broader review of the small business tax system that includes an examination of the progressivity of the income tax system as a whole. The Government’s proposed White Paper on the tax system may be an appropriate forum for undertaking this examination. Statutory Interest Model The Statutory Interest Model would largely replace that aspect of Division 7A concerned with loans with a requirement that loans to related entities bear interest at a rate specified by law from time to time. Progressive loan repayments would not be necessary and reborrowings (of principal) would be permitted. While many parts of Division 7A would be unnecessary, there would be a continued need to deal with forgiveness of debt and payments which are not loans. An advantage of this model is that it may address the use of private company loans for private purposes without complicated rules. This would occur by way of interest on such loans not being deductible. Such an approach has the potential to make the law relating to loan arrangements (as opposed to debt forgiveness and nonloan payments) between private companies and related entities more understandable to taxpayers. However, to minimise revenue impacts and to ensure shareholders do not receive a benefit where the loan is used for private purposes, this model would require the interest rate on the loan to be considerably higher than the current Division 7A rate to compensate for an interestonly loan with no principal repayments being made. Views in submissions Submissions indicated that the Statutory Interest was the most preferred model as it would greatly reduce complexity and compliance costs. Arnold Leibler stated that they are strongly supportive of the Statutory Interest Model, but only on the condition that a single interest rate should be specified and that it should be a commercial rate of interest. Greenoak Advisory Pty Ltd stated: This model would be welcomed by most taxpayers and advisors as it would greatly reduce complexity and compliance costs. It would also provide certainty and comparative simplicity of operation. Moore Stephens also expressed a strong preference for this model. They stated:
Accordingly, the Board is of the opinion that this model should only be pursued as part of a broader review of the small business tax system that includes an examination of the progressivity of the income tax system as a whole. The Government’s proposed White Paper on the tax system may be an appropriate forum for undertaking this examination. Statutory Interest Model The Statutory Interest Model would largely replace that aspect of Division 7A concerned with loans with a requirement that loans to related entities bear interest at a rate specified by law from time to time. Progressive loan repayments would not be necessary and reborrowings (of principal) would be permitted. While many parts of Division 7A would be unnecessary, there would be a continued need to deal with forgiveness of debt and payments which are not loans. An advantage of this model is that it may address the use of private company loans for private purposes without complicated rules. This would occur by way of interest on such loans not being deductible. Such an approach has the potential to make the law relating to loan arrangements (as opposed to debt forgiveness and nonloan payments) between private companies and related entities more understandable to taxpayers. However, to minimise revenue impacts and to ensure shareholders do not receive a benefit where the loan is used for private purposes, this model would require the interest rate on the loan to be considerably higher than the current Division 7A rate to compensate for an interestonly loan with no principal repayments being made. Views in submissions Submissions indicated that the Statutory Interest was the most preferred model as it would greatly reduce complexity and compliance costs. Arnold Leibler stated that they are strongly supportive of the Statutory Interest Model, but only on the condition that a single interest rate should be specified and that it should be a commercial rate of interest. Greenoak Advisory Pty Ltd stated: This model would be welcomed by most taxpayers and advisors as it would greatly reduce complexity and compliance costs. It would also provide certainty and comparative simplicity of operation. Moore Stephens also expressed a strong preference for this model. They stated:
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