Reminder – COVID-19 Division 7a Extension

Taxation and Revenue

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DATE PUBLISHED: January 20, 2021

DO YOU NEED AN EXTENSION FOR THE MYR FOR YOUR DIVISION 7A LOAN AGREEMENT DUE TO COVID-19? EXTENSION AVAILABLE!

THE EXTENSION

Due to the financial hardship that has resulted from COVID-19, the Australian Taxation Office (ATO) offered taxpayers an extension of the time for the 2019-20 income year minimum yearly repayment (MYR) under Division 7A loans.

The effect of an extension (if granted) was that the taxpayer’s failure to make the MYR for 2019-20 income year by the required due date would not result in the loan amount being treated as unfranked dividend that had been paid to the borrower.

However, those who obtained this extension via approval from the ATO should remember that the time is coming for the 2019-20 MYR payment and they should ensure that they are ready and able to make the 2019-20 income year payment by 30 June 2021.

Applications for the extension are still open, with the ATO advising that a response should be provided within five business days of the application form being lodged with them. Interested taxpayer’s should speak to their tax advisers on their ability to access the extensions.

division 7a agreement checklist

WHAT NEEDS TO BE REPAID FOR TAX PURPOSES

Taxpayers who accessed this extension should be aware that, as well as repaying the 2019-20 MYR, they also need to pay their 2020-21 MYR as well.

As such, taxpayer’s who are still facing financial difficulties should start considering whether they will be able to make the repayment of both the 2019-20 MYR and the 2020-21 MYR.

If taxpayer’s are concerned about their ability to make their repayments the taxpayer may apply to the Commissioner under other provisions of the tax law for an extension of time for paying their MYR. This includes the situation where the loan amount being treated as an unpaid dividend would result in the taxpayer suffering undue hardship. We recommend that affected taxpayer’s consider these extensions and speak to their tax advisers on their ability to access these extensions.

WHAT NEEDS TO BE REPAID UNDER THE AGREEMENT

Taxpayers should be aware that despite the ATO offering this extension to provide relief from unpaid MYR for the 2019-20 income year being treated as an unfranked dividend, this relief has no bearing on the obligations the taxpayer owes to the lender under the loan agreement.

As such, taxpayers should check whether they may be subject to penalty interest or other punitive obligations under the agreement.

DOES THE BELOW APPLY TO YOU?

  1. Are you the recipient of a Division 7A loan?
  2. Is the Division 7A loan subject to a loan agreement?
  3. Is the Division 7A loan agreement compliant for the purposes of the tax law?
  4. Did you apply for and obtain an extension from the Australian Taxation Office in relation to payment of your 2019-20 minimum yearly repayment?
  5. Are you unsure about:
    1. how much you will be required to repay and when so that you meet your obligations and the loan is not treated as an unfranked dividend;
    2. whether you will be able to make the minimum yearly repayment by the end of the company’s income year?
    3. whether you will be able to make the required repayment by 31 June 2021?

If the above applies to you, or if you have any questions in relation to Division 7A loans, contact us for advice and guidance on your legal obligations. 

Download our free Division 7A Agreement Review Checklist.

HOW CAN WE HELP YOU?

McInnes Wilson Lawyers can help you by:

  • advising on Division 7A obligations for individuals and companies;
  • assisting with applications to the Australian Taxation Office, including applications for the exercise of a discretion by the Commissioner of Taxation;
  • advising on obligations under loan agreements; and
  • drafting loan agreements.

If you require assistance or any further information please contact Taryn Hartley.

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