Division 7A Loan repayments extension if affected by COVID-19

On 22 June 2021, the ATO announced it will allow private company shareholders, and / or their associates, an extension of time to make repayments on complying Division 7A loans for 30 June 2021 due to the effects of COVID-19. If the borrower is unable to make their minimum yearly repayment (MYR) due to circumstances outside their control, caused by the COVID-19 situation, they can request an extension of up to 12 months under section 109RD of the Income Tax Assessment Act 1936 (ITAA 1936). A similar extension was allowed in respect of these repayments for the 2019-20 income year.

Complying Division 7A loan agreement

Where there is a complying Division 7A loan agreement between a private company (and certain interposed entities) and a borrower who is a shareholder or associate of a shareholder of the private company, the borrower must make minimum yearly loan repayments by the end of the private company’s income year. This will ensure the borrower is not treated as having received an unfranked dividend, generally equal to the amount of the MYR shortfall.

Repayment required by 30 June 2021

For shareholders (or associates) who are ‘unable to pay’ their MYRs (i.e. have insufficient cash-flow) by the end of the company’s 2020-21 income year (i.e. usually 30 June 2021), the ATO may allow an extension of the repayment period. However, it should be noted that the Commissioner's decision to extend the time to pay the shortfall does not alter or amend the loan agreement that the shareholder has with the company, and penalty interest may accrue for default under the loan agreement (check your loan agreement).

The approval for the extension of time for the 2020-21 MYR will affect the calculation of the payment for the 2021-22 income year because the 2021-22 MYR is based on the loan balance at the end of the 2020-21 income year. However, it should not affect the total loan repayment amounts for the 2 years as shown in the example on the ATO website as per this link: Calculating MYRs where section 109RD applies.

Request for an extension for 30 June 2021

To request an extension for 30 June 2021, the borrowers are required to complete a streamlined online application form. They will also be required to confirm the shortfall amount, state that the COVID-19 situation has affected them and that they are unable to pay part or all of the MYR as a result. No further evidence will need to be provided with the application. A separate form must be completed for each amalgamated loan (the total amount of loans received in a particular year is an amalgamated loan for that year).

Once the request is approved, the shortfall amount will not be treated as a deemed unfranked dividend, provided the shortfall is paid by 30 June 2022 (i.e. being the maximum extended period).

If the MYR shortfall is not paid by 30 June 2022, the assessment for the year ended 30 June 2021 will need to be amended to include the amount of the deemed dividend that has resulted from the shortfall. This will be unless a further extension of time or other relief can be obtained.

When to apply for the extension

Shareholders can apply for the extension at any time, including after 30 June 2021. If an application is made before the end of the company’s 2020-21 income year, a decision by the ATO may be expected within 28 business days of lodging the application form. Note that the Commissioner can only make a decision in writing after the end of the lender's 2020-21 income year.

This streamlined process only applies to applications for an extension of the MYR for the 2020-21 income year of up to 12 months under section 109RD for COVID-19 affected shareholders. It is still open to a shareholder to apply to obtain a longer extension of time outside the streamlined process under section 109RD, or for relief on the grounds of undue hardship under section 109Q (which has further requirements).

Extension for 30 June 2020

A similar extension was also available for 2019-20 MYRs. Shareholders that obtained this extension are still required to make a payment for 2019-20 shortfalls by 30 June 2021. Any further requests for an extension of time in relation to 2019-20 shortfalls must be made outside the streamlined process.

The extension available through the streamlined online application is not intended to be available for 2021-22 and later income years.

BDO Comment

BDO can assist in making the section 109RB application. If you are affected by COVID-19 and it means you are unable to pay or not fully pay the 2020-21 MYR please contact your BDO adviser to discuss your situation.