In October 2018, Federal Treasury released a paper titled “Targeted amendments to the Division 7A integrity rules”. If the new rules go ahead the following will be affected, and will need to be reviewed prior to 30 June 2019:
- Existing Div 7A loans
- Loans established before December 1997 that predate the introduction of Div 7A
- Unpaid present entitlements (UPE)
Whilst there are proposed to be some transitional arrangements, it is important to note that there will not be any grandfathering of existing agreements.
What is changing to Div 7A loans?
- Higher interest rates
- All loans will now have a 10 year loan term, no more 7 or 25 year option
- Other changes can be read in full here
- The changes are summarised in the table below
What do I need to do?
- Review all current Div 7A loans before 30 June 2019
- Make arrangements to transition clients Div 7A repayments to a higher interest rate and shorter loan term
- Where you feel a client is going to be unable to make the payments under the higher rate / shorter term, FundingPro may be able to assist in refinancing their Div 7A loan to an arms length lender
A practical example
- Assuming a client just established a 25 year loan, but is now required to move to a 10 year term
- Interest rate is increased by more than 3%
- The combination of shorter loan term and higher rate would be a 209% increase in repayments