COVID-19 and Division 7A relief

COVID-19 and Division 7A relief

The ATO has announced some limited relief for private companies that have loans to their shareholders or related parties that are governed by what are referred to as “complying loan agreements”.

A complying loan agreement is entered into to avoid triggering an assessable deemed dividend that could potentially be equal to the amount of the loan from the private company.

When there is a complying loan agreement between a private company and a borrower, the borrower must make the minimum yearly repayment (MYR) by the end of the private company’s income year.  This avoids the borrower being considered to have received an unfranked dividend, generally equal to the amount of any MYR shortfall.

As a result of the COVID-19 situation, the ATO understands that some borrowers are facing circumstances beyond their control.  To offer more support, the ATO will allow an extension of the repayment period for those borrowers who are unable to make their MYR by the end of the lender’s 2019–20 income year (generally 30 June).

Requesting the extension

A request for a 12-month extension can be made through the completion of an online application.  Borrowers 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.

When the ATO approves an application, it will let the borrower know they will not be considered to have received an unfranked dividend.  This is subject to the shortfall being paid by 30 June 2021. It will not be necessary to submit further evidence with the application.

This particular streamlined process established by the ATO only applies to applications for an extension of up to twelve months for COVID-19 affected borrowers.   It is still open to a borrower to apply to obtain a longer extension of time outside the streamlined process.