On Monday 21st June 2021, The Australian Tax Office (ATO) extends Division 7A Relief for tax payers who have been unable to meet the minimum yearly repayments on Division 7A loans due to the impact of the covid-19 pandemic.

The relief applies to Australians who are unable to make their minimum yearly repayments (MYRs) by the end of the lender’s 2020–21 income year due to the ongoing effects of COVID-19 under section 109RD.

Last year (ATO) extends Division 7A Relief for the 2019-20 MYR. Taxpayers who obtained the extension last year will be required to make up the shortfall of their 2019–20 MYR by 30 June 2021.

Borrowers who are seeking the relief this year will be required to complete a streamlined online application form where they will be asked to confirm the shortfall, that the Covid-19 situation has affected them and that they are unable to pay the MYR as a result.

The ATO can only make a decision in writing after the end of the lender’s 2020–21 income year, within 28 days on receipt of the lodgement form.

Once the application has been approved, borrowers will be informed that they will not be considered to have received an unfranked dividend if the shortfall is paid by 30th June 2022.

The streamlined application process only applies to applications for an extension of the 2019–20 and 2020–21 MYR of up to 12 months under section 109RD for COVID-19-affected borrowers, with the ATO noting that it is not intended to be available in the 2021–22 income year and beyond.

Borrowers can still 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.

The ATO Extends Division 7A Relief: When Does Division 7A Apply?

Division 7A is applied when a payment or some other benefit by a private company is provided to a shareholder or an associate.  A payment or other benefit can include:

  • private use of company assets
  • gifts
  • transfer of company assets
  • loans and other forms of credit
  • writing off (forgiving) a debt
  • guarantees

Division 7A can also apply when a private company provides a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has subsequently provided a payment or benefit to the company’s shareholder or their associate.

Payments or other benefits provided by companies to shareholders or their associates can be treated as an assessable dividend under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.

Division 7A applies to payments, loans and debts forgiven on or after 4th December 1997. However, it might also apply to loans in place before this date, where the amount of the loan is increased or its term extended on or after 4th December 1997.  Division 7A applies to debts forgiven on or after 4th December 1997, regardless of when the debt was created.

When Doesn’t Division 7A Apply?

Division 7A does not apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as director’s fees or normal dividends.

Payments made to these parties in the normal course of business, such as wages, expenses or repayments of loans, do not constitute a Division 7A loan.

A payment or benefit that is potentially subject to Division 7A is not treated as a dividend if it is repaid or converted into a Division 7A complying loan by the company’s lodgment day for the income year in which the payment or benefit occurs.