ATO to allow extended time for minimum yearly repayments on Div 7A loans

Many incorporated business owners may twitch a little whenever the term Division 7A is uttered within earshot — and not just those who may have attempted to make “tax-light” distributions.

The fact is, in these COVID-19 times, that concerns about Div 7A applying are understandable. Some borrowers are facing circumstances beyond their control, and even making the minimum yearly repayments required under complying loan agreements may be out of reach.

The ATO has now announced that it is going to allow extensions to the repayment period for those borrowers who are unable to make their minimum yearly repayment (MYR) by the end of the lender’s 2020-21 income year.

The ATO says borrowers can request the extension by completing an application form which, when approved, will confirm that the shortfall in MYR will not be a deemed dividend if the borrower pays the shortfall within the extended time. After lodging the form, the borrower will be asked to confirm the shortfall, stating that the COVID-19 situation has affected them and that they are unable to pay the MYR as a result.

When the ATO approves an application, it will let the borrower know they will not be considered to have received an unfranked dividend — but this is subject to the shortfall being paid by 30 June 2022. The ATO says it won’t be necessary to submit further evidence with the application.

Note however that this streamlined process only applies to applications for an extension of up to 12 months under section 109RD for COVID-19 affected borrowers. It is still open to a borrower to apply to obtain a longer extension of time outside the streamlined process under section 109RD, or for relief on the grounds of undue hardship under section 109Q (which has further requirements).

Also worth noting is that the Commissioner’s decision to extend the time to pay the shortfall does not alter or amend the loan agreement with the lender. This includes penalty interest remedies for default under the loan.

The ATO says if anyone has any general queries on the administrative relief for Division 7A, email PWDiv7Arelief@ato.gov.au

Harper Group Pty Ltd – Chartered Accountants Frankston - Ph 9770 1547 

Disclaimer: All information provided in this article is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.

Please note we at Harper Group Pty Ltd are not licensed to provide financial product advice under the Corporations Act 2001 (Cth) and taxation is only one of the matters that must be considered when making a decision on a financial product, including on whether to make superannuation contributions. You should consider taking advice from the holder of an Australian financial services licence before making a decision on a financial product.