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COVID-19 | ATO confirms reprieve for Division 7A loan repayment

Before the new financial year 2020, the ATO announced an extension to repayments for Division 7A loans for those impacted by COVID-19.

What does that mean? Let’s start from the start.

Understanding Division 7A

Division 7A is an Australian tax law. The law details restrictions for shareholders and associates of private companies utilising company funds for personal use.

Basically, Division 7A states that particular payments, loans and debts made by private companies to shareholders and associates are considered unfranked dividends. These unfranked dividends are therefore considered part of the recipient’s income.

The law was designed to discourage company funds being used for personal purposes, over and above wages, salary or directors’ fees. For example, if a company shareholder was paid a salary of $100,000 and also withdrew $50,000 to purchase a recreational boat for personal use. Under Division 7A, this withdrawal would be considered an unfranked dividend. The withdrawal would also impact the shareholders taxable income for that financial year i.e. the taxable income would be $150,000.

For the shareholder to avoid this unfranked dividend and therefor the extra tax liability, there are a few options;

  • Repay the amount in full in the same financial year the funds were withdrawn either in cash or as a fully franked dividend.
  • Consider entering into a complying loan agreement with the company. This type of arrangement involves specific conditions which you can touch based with the CVW Accounting team about.

 

What constitutes a loan?

Division 7A is applied when a private company loans funds to an entity (or individual) and the recipient of the funds is either;

  • a shareholder or
  • an associate of a shareholder of the company e.g. direct family member, or
  • when a reasonable person could conclude a payment was made because the recipient was a shareholder or an associate of a shareholder at some time

 

To be clear, Division 7A defines a loan as any of the following;

  • a monetary advance
  • provision of credit or other form of financial dispensation
  • payment for a shareholder or their associate, on their account, on their behalf, or at their request if there is an obligation to repay the amount
  • a transaction in whatever form that is the same as a loan of money

Division 7A is often misunderstood by private company shareholders who are unaware of their obligations.

That’s why CVW Accounting Senior Accountant Mark Chong believes it’s important to get the right advice in order to avoid being caught out at tax time.

“Division 7A is an example of one of the intricacies of tax legislation that exists under Australian law,” Mark said.

“It highlights the importance of obtaining specialised advice. Including any overlap between Division 7A, fringe benefits tax and other Tax Act provisions.”

For further information touch base with the CVW Accounting team, we’re happy to help.

 

ATO reprieve for Division 7A loan repayment

With the above information in mind the following may make more sense.

The relief relates to taxpayers affected by COVID-19 unable to make minimum yearly repayments on Division 7A loans by the end of the 2020 income year.

In such cases, it is now possible to apply for an extension to make the repayments. Application can be made via a streamlined application process created by the ATO. However, these shortfalls will need to be resolved by 30 June 2021.

ATO approved applications will be advised that outstanding payment will not be considered an unfranked dividend in the 2020 year. However the repayment must be made by 30 June 2021.

The online application form and guide can be found here.

If you need assistance or have questions please do not hesitate to contact CVW Accounting on 9219 1300.

 

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