The Government has released a Treasury discussion paper on its 2009-10 Budget decision to tighten the non-commercial loan rules in Division 7A of the Income Tax Assessment Act 1936.

Division 7A provides tax integrity rules designed to prevent private companies from making tax‑free distributions of profits to shareholders (or their associates). In particular, advances, loans and other payments or credits to the shareholders or associates are, unless they come within specified exclusions, treated as assessable dividends to the extent that the company has realised or unrealised profits.

The Government’s announced changes extend the Division 7A rules so that ‘payment’ includes the use of company assets by a shareholder (or their associate) for free or at less than their market values.

The changes include amendments to prevent corporate limited partnerships being used to circumvent the non-commercial loan rules.

Comments on the discussion paper can be made until 3 July 2009.