Div 7A minimum payment extension due to COVID

With large swathes of Australia in the midst of another lockdown, the persistent effects of COVID-19 continues to hamper the economy and causing hardship for individuals. To assist shareholders or associates that have difficulty meeting minimum yearly payments under Div 7A, the ATO has announced a concessional extension to the payments until 30 June 2022. This extension can be applied for through a streamlined online form. Borrowers requiring a longer extension due to undue hardship are unable to use the streamlined form and have to apply to the ATO separately.

Div 7A was conceived as a means to ensure that income was not inappropriately sheltered in closely held corporate structures at the corporate tax rate. It does so by deeming certain transactions between private companies and their shareholders/associated persons to be assessable dividends.

Broadly, there are three situations were a private company may be taken to pay a dividend: where an amount is paid by the company to a shareholder/associate of shareholder; where an amount is loaned to a shareholder/associate of shareholder by the company; and where the company forgives a debt owed by a shareholder/associate of the shareholder.

However, a loan by a private company will not be taken to be a dividend if the borrower, among other things, makes minimum yearly repayments by the end of the private company’s income year. This avoids the borrower being deemed to have received an unfranked dividend equal to the amount of any minimum yearly repayment shortfall.

Due to COVID-19, the ATO notes that some borrowers may be facing financial hardship and difficulty in meeting these minimum yearly payments. Thus, it has announced that it will allow an extension of the repayment period for borrowers who are unable to meet their minimum yearly repayments by the company’s (ie lender’s) 2020-21 year end, which is generally 30 June.

For this extension to apply, borrowers will need to fill in a streamlined online application form, which requires confirmation of the repayment shortfall amount, an explanation of the COVID-19 situation that they have been adversely affected by, and how it affects their ability to make the minimum yearly repayments. The ATO also requires information about the entity that made the loan as well as the terms of the loan.

According to the ATO, a response can be expected within 28 business days of lodging the form, but any forms lodged before the end of the relevant company’s financial year will only be responded to after the end of the financial year (ie the Commissioner can only make a decision in writing after the end of the company’s 2020-21 financial year).

Remember, if you receive an extension from the ATO, paying the 2020-21 minimum yearly repayment shortfall is in addition to the requirement to pay the minimum yearly repayment for the 2021-22 income year.

Where the application for the minimum payment extension is approved, the ATO will let the borrower know that they will not be considered to have received an unfranked dividend. However, this is subject to the shortfall amount being paid by 30 June 2022. Borrowers requiring a longer extension due to undue hardship are unable to use the streamlined form and will need to apply to the ATO separately. Note however, additional requirements may need to be met.

For borrowers who have their extension application approved but don’t pay the required amount by 30 June 2022, an amendment of their 2020-21 income tax return will need to be sought. The ATO notes that this should include the amount of dividend that had resulted from the shortfall. This amendment is required unless the borrower is able to obtain a further extension of time or other relief.

Need year-end help?

With 2020-21 financial year now closed for most companies, if there are shareholders or associates that have trouble repaying loans under the minimum yearly repayment terms, we can help lodge an extension. Contact us today for help on this and many other tax issues.