Thinking | 29 June 2020

Division 7A minimum yearly repayment relief – too little too late?

By Michael Parker and Andrew O’Bryan

After weeks of waiting with bated breath, we have finally had word from the Australian Taxation Office (ATO) about relief for taxpayers from the need to make annual repayments of complying Division 7A loans. For many it will be a case of too little too late.

We expect many taxpayers and their advisers will have simply run out of time and pressed on with having private companies declare assessable dividends in order satisfy the minimum yearly repayments. The trouble is that that those taxpayers may not have capacity to pay the resulting assessments.

For those who haven’t pressed the button already, the ATO is offering a streamlined application process for the Commissioner’s discretion to allow a deferral of the minimum yearly repayment for the 30 June 2020 year until 30 June 2021.

Taxpayers applying for the extension will need to advise the ATO of the amount of the minimum yearly repayment shortfall, that they are impacted by COVID-19 and that they are ‘unable’ to make the repayment as a result. Inability to pay means a lack of cash flow and is said to be a question of fact to be determined from the surrounding commercial circumstances, including matters such as the ability to realise assets or use them as security for external funding.

Given this guidance has been released so close to 30 June 2020, it’s to be hoped the ATO will take a pragmatic approach and realise that, at this late stage, it will be practically difficult to arrange funding or sell assets.

The ATO says a decision will be made within five business days of an application being made.

Of course, the practical dilemma facing taxpayers and their advisers is that with 30 June 2020 a matter of hours away, taxpayers will not have any certainty prior to 30 June 2020 that the extension will be granted.

So, do you press the button on those dividends or roll the dice and hope for the extension being granted after 30 June 2020?

Successful applicants will receive a 12 month extension to make the minimum annual repayment. That will then mean they are required to repay two years of minimum yearly repayments by 30 June 2021.

We had hoped the loan term would have been extended by a year, or even that the missed repayment would be spread over the term of the loan. The cash flow impacts will be challenging, to say the least.

Contact

Michael Parker

Michael is a tax lawyer who specialises in tax disputes, capital gains tax, business sales and acquisitions and restructuring.

Andrew O’Bryan

Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.

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