Div 7A and COVID-19 affected borrowers: ATO 12-month payment extension

Stuart Jones, Senior Tax Writer, Weekly Tax Bulletin, Thomson Reuters

The ATO has granted a 12-month payment extension for COVID-19 affected borrowers concerning the requirement to make the minimum yearly repayment for Div 7A purposes.

When there is a complying loan agreement between a private company (and certain interposed entities) and a borrower under s 109N of the ITAA 1936, the borrower must make the minimum yearly repayment (MYR) by the end of the private company’s income year. This avoids the borrower being considered to have received an unfranked dividend, generally equal to the amount of any MYR shortfall (referred to as the shortfall).

As a result of the COVID-19 situation, the ATO says it understands that some borrowers are facing circumstances beyond their control.

To offer more support, the ATO has announced that it will allow an extension of the repayment period for those borrowers who are unable to make their MYR by the end of the lender’s 2019-20 income year (generally 30 June) under s 109RD.

Borrowers can request the extension by completing a streamlined online application on the ATO website. The ATO says it will ask the borrower to confirm the shortfall, 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. This is subject to the shortfall being paid by 30 June 2021. It won’t be necessary to submit further evidence with the application, the ATO said.

The ATO said this streamlined process only applies to applications for an extension of up to 12 months under s 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 s 109RD, or for relief on the grounds of undue hardship under s 109Q (which has further requirements).

The ATO says affected taxpayers can apply at any time and expect a response from the ATO within 5 business days of lodging the application form. If they apply before the end of the lender’s 2019-20 income year, they will need to wait until after that time for a decision. The ATO says the Commissioner can only make a decision in writing after the end of the lender’s 2019-20 income year.

If taxpayers don’t pay their MYR in full by the end of the lender’s 2019-20 income year, the ATO says they will need to make an increased MYR in the 2020-21 income year. Payment by taxpayers of as much as they can towards their 2019-20 MYR will minimise the amount of their 2019-20 MYR shortfall and the increased MYR in the 2020-21 income year, the ATO said.

Stuart Jones is a Senior Tax Writer with Thomson Reuters and a respected commentator on all matters superannuation. Stuart is the author of the Australian Superannuation Handbook and contributes extensively to other Thomson Reuters’ services, including the Australian Tax Handbook.

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