The ATO has clarified its position regarding loans, and the repayments of loans that may have been put on hold for the period that COVID-19 has a grip on the economy and our lives.
An important sidebar to the ATO’s announcement is the implications regarding Division 7A — just in case you had a client who may have displayed some stress about possible Div 7A outcomes because a creditor has not insisted on payment.
In normal circumstances, if a private company forgives a debt, it is considered a deemed dividend under Division 7A — “a debt is forgiven if a reasonable person would conclude a creditor will not insist on payment or rely on the borrower’s obligation to pay”.
But the ATO states (see here) that “allowing more time to replay a debt due top COVID-19 will not result in the debt being treated as forgiven”.
Further, it says: “If a creditor only postpones an amount payable and the debtor acknowledges the debt, a debt is not considered forgiven. This is unless there is evidence that the creditor will no longer rely on the obligation for repayment.”
The above concerned client however may have missed the following.
Late in June 2020, the ATO issued an announcement entitled Request to extend time to make minimum yearly repayments for COVID-19 affected borrowers under section 109RD. It says, in part: “As a result of the COVID-19 situation, we understand that some borrowers are facing circumstances beyond their control. To offer more support, we’ll allow an extension of the repayment period for those borrowers who are unable to make their MYR” (minimum yearly repayment) “by the end of the lender’s 2019-20 income year (generally 30 June).”
Relating as it does to a possible inability of borrowers under Division 7A loan agreements to make the minimum yearly repayment required by 30 June 2020 due to the COVID-19 economic situation, the announcement provides a procedure whereby a borrower who is unable to make repayments on a Division 7A loan can request an extension of time to make the minimum yearly repayment under section 109RD of the Income Tax Assessment Act 1936.
The announcement provides a form that can be downloaded from the above web page that requests the extension of time to make the minimum yearly repayment. If approved, the extension of time will be until 30 June 2021. A separate form must be lodged for each loan.
The benchmark interest rate for Div 7A purposes, by the way, is 4.52% for the income year ending 30 June 2021, the ATO has announced, and is relevant to private company loans made or deemed to have been made after 3 December 1997 and before 1 July 2020 and to trustee loans made after 11 December 2002 and before 1 July 2020.