Division 7A loan repayment period extended
When a private company makes a loan to an associate or shareholder during an income year, Division 7A of the Income Tax Assessment Act can deem the company to have paid an unfranked dividend.
The dividend is considered part of the recipient’s assessable income and is taxed accordingly.
This is unless the loan is either:
- repaid before the due date of the company’s lodgement of its income tax return (or actual date of lodgement, if earlier)
- placed under a complying loan agreement before the due lodgement date.
Complying loan agreements (also known as Division 7A loans) require recipients to make minimum yearly repayments (MYRs) of principal and interest over a set period (a maximum of seven years, in the case of an unsecured loan). Otherwise, it will be assessed as a dividend.
2020–21 MYR extension
As part of the federal government’s COVID-19 support, borrowers unable to make their MYRs by the end of the lender’s 2020–21 income year (generally June 30) can apply to the ATO to have the repayment period extended.
Applicants need to confirm their inability to pay their MYRs is a result of the COVID-19 pandemic.
This inability is about cash flow, not an excess of assets over liabilities, so before applying they need to consider:
- their cash resources
- money they can readily obtain by realising their assets or using those assets as security to obtain finance.
While they’ve been given a reprieve, Division 7A loan recipients must still make up the shortfall of their 2020–21 MYRs by 30 June 2022.
This is in addition to the minimum yearly repayments they need to make for the 2021–22 financial year.
2019–20 MYR extension
A similar extension was available for MYRs in the 2019–20 income year; borrowers who were granted the extension needed to have made up their shortfall by 30 June 2021.
Those who failed to meet this deadline had to either:
- obtain a further extension of time outside of the ATO’s streamlined online-application process
- amend their 2019–20 tax return to include a dividend.
Are you unable to make the minimum yearly repayments on an Division 7A loan because of COVID-19?
We can help you determine your inability to make the MYRs — based on the ATO’s guidelines — and assist you with your application to extend your repayment period.
If you’re experiencing undue hardship, there are other provisions of Division 7A we can look to apply on your behalf.
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