Debt forgiveness and Division 7A reprieve for loans put on hold during COVID-19
The Australian Taxation Office has recently set out its position on the debt forgiveness consequences and Division 7A consequences where loans are put on hold during the COVID-19 pandemic.
In a pragmatic approach, the ATO has confirmed that a debt is not considered forgiven where repayments are postponed, unless there is evidence that a creditor will no longer rely on an obligation for repayment.
For Division 7A purposes, the ATO accepts that allowing a borrower more time to repay a debt due to COVID-19 will not result in the debt being treated as forgiven, unless a reasonable person would conclude a creditor will not insist on payment or rely on the borrower's obligation to pay.
It is likely that the ongoing impact of COVID-19, particularly in Victoria where strict lockdown restrictions remain in place, will mean that many taxpayers will be seeking a moratorium on their commercial and related party loan arrangements. While the ATO's position may alleviate immediate cash flow issues, commercial and related party loan arrangements repayments will eventually need to resume.
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