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Division 7A loan repayment period extended

alfcouceiro_img2
Published by:
Alf Couceiro
Published on:
August 09, 2021
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.

Need help?

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.

Contact us for a complimentary consultation at info@modoras.com or 1300 888 803.

Make tax time count. Know what you need to prepare for tax time this year.

IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (VIC) Pty Ltd ACN 145 368 850. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (VIC) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (VIC) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (VIC) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (VIC) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.

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