Division 7A applies to loans, payments and the forgiveness of loans by private companies to a shareholder or shareholder’s associate. The Division can also apply when a trust distributed income to a company but the trust has yet to pay the distribution i.e. there is an unpaid present entitlement (UPE).
As a result of COVID-19, many borrowers are experiencing circumstances beyond their control which have caused difficulties in meeting minimum yearly repayments on Division 7A loans. In recognition of this, the Australian Taxation Office (ATO), has indicated that it will allow an extension of the repayment period for borrowers who are unable to make their minimum yearly repayment for the 2019-20 year and have offered a streamlined application process to obtain an extension of time faster. Borrowers, shareholders and their associates, who wish to apply for an extension of time can complete the ATO’s streamlined online application. To obtain an extension of the repayment period under the streamlined process, borrowers will need to show that they are unable to make the full minimum yearly repayment by the end of the lender’s income year and their inability to make the minimum yearly payment in full, is due to COVID-19.
In determining whether a borrower is unable to pay, borrowers should consider their cash resources and whether it is possible to realise assets as security to obtain finance. To be considered unable to pay due to COVID-19, borrowers must also show the direct or indirect impact of the coronavirus on them.
The ATO has stated that it will respond to borrowers who apply using the ATO’s online form of whether the extension of time is granted within 5 business days of receiving their application. However, borrowers who apply before a company’s income year has ended will need to wait until after the income year has ended for a decision.
If the extension of time is granted under the streamlined process, borrowers will have until 30 June 2021 to make their minimum repayment for the 30 June 2020 income year.
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