Division 7A Amendments
In the 2017 Budget, the Government announced it would make targeted amendments to improve the operation and administration of Division 7A of the Income Tax Assessment Act 1936 (Division 7A).
The amendments were to apply from 1 July 2018, but will now apply from 1 July 2019 and will introduce:
- a self-correction mechanism to assist taxpayers to rectify inadvertent breaches of Division 7A promptly;
- appropriate safe harbour rules to provide certainty and simplify compliance for taxpayers;
- simplified rules regarding complying Division 7A loans, including in relation to loan duration and the minimum interest rate;
- a number of technical amendments to improve the integrity and operation of Division 7A and provide increased certainty for taxpayers.
The proposed changes draw on a number of recommendations from the Board of Taxation’s Post Implementation Review into Division 7A.
Ipso Facto – Imminent Changes
‘Ipso facto’ clause – what is it and where are they usually found?
An ipso facto clause usually allows a party to terminate or vary the terms of a contract where a specific event occurs in relation to the other party, such as an ‘insolvency event’. An ipso facto clause can be found, for example, in supply and distribution contracts.
Generally a contract will be drafted to allow for termination for a number of different ‘insolvency events’, however these changes will only apply to administration, receivership and schemes of arrangement.
What are the changes and when will they apply?
The changes will prevent a party to a contract from exercising their ‘ipso facto’ rights where the other party is in administration or receivership or under (or soon to be under) an insolvent scheme of arrangement. It’s worth noting that the ‘stay period’ will vary depending on which of these ‘insolvency events’ applies. Rights that automatically apply without a party to the contract having to take action (self-executing provisions) will also be captured by these changes.
Implementation of these changes is occurring to prevent ipso facto clauses from reducing a company’s ability to turn its situation around (for example, by a successful restructure or sale of the business as a going concern). It is important to note that the changes will not affect other termination rights arising in a contract, such as for a party’s failure to pay.
The changes will apply to contracts, agreements and arrangements that are entered into after 1 July 2018. Exemptions are also proposed for particular contracts and rights.
Why is this important for me?
Turn your mind to how the changes could affect contracts that will be entered into after 1 July 2018 (e.g. template contracts). Contracts may need to be amended to ensure that a party has appropriately protected its commercial interest.
We recommend you get independent advice from a solicitor or insolvency expert if you wish to proceed exercising rights including termination or a variation right arising under an ipso facto clause. The legislation is complex and liability may arise for wrongfully terminating the contract or for failing to perform certain obligations in reliance on an unenforceable right under an ipso facto clause.
McFillin & Partners are committed to providing our clients with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations. If you would like further clarification on the above, please do not hesitate to contact our office on 3263 7030.
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