Deferral of minimum yearly repayments
As part of the ATO's response to COVID-19, the Commissioner announced on 26 June 2020 that taxpayers suffering the economic impact of coronavirus and who are unable to meet their minimum yearly repayments in respect of Division 7A loans will be able to apply to defer their minimum yearly repayments for 12 months.
Most advisors will be aware that the borrower under a Division 7A loan must make minimum yearly repayments in respect of the loans on or before 30 June each year. However, under section 109RD of the Income Tax Assessment Act 1936, the Commissioner is provided with discretion to disregard a deemed dividend which would result from the failure to make the minimum repayments, where the inability to make the payment is due to circumstances outside of the borrower's control. It is this administrative power that the Commissioner will rely upon to allow additional time to make the payment for those taxpayers adversely affected by COVID-19.
Affected taxpayers may apply online, using the approved form, for an extension of time to make their minimum yearly repayments. If the ATO approves the application, taxpayers will be allowed until 31 June 2021 to make their repayments (noting that the following year's repayment will also fall due at that time).
There is still some uncertainty in relation to such applications – in that the borrower will not know whether the Commissioner will exercise his discretion until such time as the date for payment has passed (and the minimum yearly repayment has not been made). If the borrower's application is ultimately disallowed, it will not be possible to go back and make the required payment, or declare a dividend to meet the repayment obligation as at 30 June 2020. However, where genuine circumstances prevent the payment being made, it is expected that the discretion will be exercised. In addition, it may still be open to the taxpayer to request exercise of the Commissioner's discretion under section 109RB (honest mistake or inadvertent omission), or 109Q (undue hardship).
Importantly, the fact that the time period for making a minimum repayment is extended should not result in a debt forgiveness for Division 7A purposes. In order to give rise to the forgiveness of a debt, the debtor needs to be relieved from obligation to pay the debt, or there must be other evidence that the creditor will not require repayment. As the relief provided should only postpone payment by the debtor of the minimum yearly repayment owed, the debt should not be considered forgiven for Division 7A purposes.
Status of Division 7A amendments
In other Division 7A news, the Federal Government announced on 30 June 2020 that the proposed changes to Division 7A (first announced in the 2016-17 Federal Budget) will now only apply in relation to income years commencing after the date of Royal Assent of the enabling legislation.
The changes will be progressed as a 'single consolidated package' which addresses:
- unpaid present entitlements under Division 7A;
- the previously announced self-correction mechanism for inadvertant breaches;
- safe habour and simplified compliance rules; and
- a number of previously announced technical amendments to Division 7A.
This is a welcome announcement and a sensible approach given the uncertainty in recent years of the continued delay in commencement of the previously announced changes. However, having regard to the significant concerns raised with respect to a number of the proposed measures, the postponement will now lead to yet further delay and continued uncertainty for taxpayers with Division 7A (or potential Division 7A) balances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.