Taxpayers affected by COVID-19 will now be able to request for an extension of time to meet the minimum yearly repayment on complying Division 7A loans.
The ATO will now allow an extension of the repayment period for those borrowers who are unable to make their minimum yearly repayment (MYR) by the end of the lender’s 2019–20 income year, following pressure from the joint bodies.
Taxpayers who are affected by COVID-19 will need to request the extension through an ATO form, with the Tax Office noting that a response will be provided within five business days of lodging.
Borrowers who are unable to make the 2019–20 MYR will be given until 30 June 2021 to make the payment, on top of the MYR for 2020–21.
Approval by the ATO will mean that taxpayers will not be considered to have received an unfranked dividend, if they pay the shortfall by 30 June 2021.
The Tax Institute’s senior advocate, Robyn Jacobson, said practitioners would now have certainty despite the ATO’s guidance coming just days before 30 June.
“While year-end is only five days away, there is no rush to act on this now. The discretion can be sought at any time until 30 June 2021, although you will need to wait until after 30 June 2020 for a decision if you apply immediately,” Ms Jacobson told Accountants Daily.
“Practitioners should firstly determine whether their client can make the required MYR by next Tuesday, 30 June. If not, they can apply for more time to make the 2019–20 payment using the approved form.”
Ms Jacobson also noted that if the extension is allowed by the ATO, 2019–20 interest will not be capitalised but will still be required to be paid.
“If the ATO’s discretion to allow more time to make the 2019–20 MYR is not exercised, the amount of the shortfall for 2019–20 will need to be included as a deemed dividend in the shareholder’s 2019–20 assessable income,” she added.
“While it is pleasing to see a resolution of this issue, it has caused unnecessary anxiety which has compounded the anxiety that has come from the economic stimulus measures.”
The ATO’s form will include three sections, including details about the terms of the loan and the MYR shortfall.
Taxpayers will also be required to provide details about how COVID-19 has affected their ability to make the MYR.
“For a business, an important question to ask is whether you can pay your way in carrying on your business. For example, a business is unable to pay if it needs to sell its trading stock outside the course of its business to obtain the funds,” the ATO said.
“An individual is unable to pay where they need to use the assets necessary to maintain an adequate living standard for themselves and their family to make a payment.
“Whether you are unable to pay is a question of fact you must determine in a practical business environment. It is a matter of commercial reality, taking into account all of the circumstances.
“When completing this form, the practical business environment includes the economic effects and degree of uncertainty that has resulted from the COVID-19 situation.”
The ATO notes that significant penalties apply for making false or misleading statements.
Additional details and the approved ATO form can be viewed here.
26 June 2020