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  • Request to extend time to make 2020–21 minimum yearly repayments for COVID-19 affected borrowers under section 109RD

    When there is a complying loan agreement between a private company (and certain interposed entities) and a borrower under section 109N, the borrower must make the minimum yearly repayment (MYR) by the end of the private company’s income year. This avoids the borrower being considered to have received an unfranked dividend, generally equal to the amount of any MYR shortfall (referred to as the shortfall).

    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 by the end of the lender’s 2020–21 income year (generally 30 June) under section 109RD.

    A similar extension was provided to taxpayers in respect of MYRs for the 2019–20 income year. See Request to extend time to make 2019–20 minimum yearly repayments for COVID-19 affected borrowers under section 109RD for further information

    Requesting the extension

    Borrowers can request the extension by completing a streamlined online application. We'll ask the borrower to confirm the shortfall, that the COVID-19 situation has affected them and that they are unable to pay the MYR as a result.

    When we approve an application, we'll let the borrower know they will not be considered to have received an unfranked dividend. This is subject to the shortfall being paid by 30 June 2022. It won't be necessary to submit further evidence with the application.

    If you have any general queries on the administrative relief for Division 7A, email PWDiv7Arelief@ato.gov.au

    This streamlined process only applies to applications for an extension of the MYR for the 2020–21 income year of up to twelve months under section 109RD for COVID-19 affected borrowers. It is still open to a borrower to apply to obtain a longer extension of time outside the streamlined process under section 109RD, or for relief on the grounds of undue hardship under section 109Q (which has further requirements).

    Where a borrower obtained an extension to pay the 2019–20 MYR shortfall by 30 June 2021 and requires further time to pay the shortfall, it is open for the borrower to apply to obtain a longer extension outside the streamlined process under section 109RD or relief on the grounds of undue hardship under section 109Q.

    See also:

    When to use this form

    If you have been affected by the COVID-19 situation, use this form to apply for more time to make your minimum yearly repayment (MYR) if you are unable to pay it in full by the end of the lender’s 2020–21 income year.

    It requests the Commissioner to make a decision that the shortfall in your MYR will not be a deemed dividend at the end of the lender’s 2020-21 income year if you pay the shortfall within the extended time.

    You can apply at any time and expect a response within 28 business days of lodging the application form. If you apply before the end of the lender's 2020–21 income year, you will need to wait until after that time for a decision. The Commissioner can only make a decision in writing after the end of the lender's 2020–21 income year.

    If the Commissioner gives the extension, you must pay the shortfall by 30 June 2022.

    About the form

    This form has 3 sections:

    • Section A – your personal details
    • Section B – details about the entity that made the amalgamated loan, the terms of that loan and the MYR shortfall
    • Section C – details about how the COVID-19 situation has affected your personal circumstances.

    You must complete ALL questions.

    You'll need to lodge a separate form for each amalgamated loan.

    To help you complete this form:

    Significant penalties apply for making false or misleading statements.

    How to lodge

    Complete the form and attach it to a secure message in one of the following services:

    Online services for agents:

    • at the Client summary select Profile
    • select New Message
    • select the topic Income Tax
    • select subject Div 7A relief
    • complete the message text and add the Form
    • select the declaration and then select send
    • an ATO receipt number will be provided to confirm your message has been sent.

    Online using: Online services for business

    • Select Communication then Secure mail
    • select New
    • select the topic - Income Tax
    • select subject Div 7A relief
    • if required, include a message then attach your saved form
    • complete the declaration before you send the form
    • an ATO receipt number will be provided to confirm your message has been received.

    Do not email your form to the Division 7A relief mailbox, as sending emails has the risk of potential compromise of personal information as transmission is on a public domain.

    Next steps:

    Things you should know

    The Commissioner's decision to extend the time for you to pay the shortfall does not alter or amend the loan agreement that you have with the lender. This includes penalty interest remedies for default under the loan.

    If you don't pay your MYR in full by the end of the lender's 2020–21 income year, you will need to make an increased MYR in the 2021–22 income year. Paying as much as you can towards your 2020–21 MYR will minimise the amount of your 2020–21 MYR shortfall and the increased MYR in the 2021–22 income year.

    Paying the amount of your 2020–21 MYR shortfall is in addition to meeting your increased MYR for the loan for the 2021–22 income year. A part of the increase in your MYR is counted towards the payment of the MYR shortfall. See below example Calculating MYRs where section 109RD applies.

    If you don't repay the shortfall within the extended time

    Once we approve your application, you must pay the MYR shortfall by 30 June 2022 to avoid Division 7A consequences. If you don't pay within this time, you'll need to seek an amendment of your assessment for the 2020–21 income year to include the amount of the dividend that had resulted from the shortfall. This applies unless you are able to obtain a further extension of time or other relief.

    Other relief

    You can apply outside the streamlined process if you are requesting:

    • an extension of time under section 109RD to pay the MYR shortfall after 30 June 2022
    • a change to a condition in a decision under section 109RB
    • the dividend the company would be taken to pay as a result of the MYR shortfall be disregarded where the dividend would cause you to suffer undue hardship
    • a further extension to pay a 2019–20 MYR shortfall after 30 June 2021.

    Example: Calculating MYRs where section 109RD applies

    Oz Land Pty Ltd lent its shareholder Dorothy $1,000 under a section 109N complying loan agreement during its income year that ended on 30 June 2018. The term of the loan is seven years and the loan agreement does not provide for the capitalisation of interest (at the benchmark interest rate) that is not paid by the due date.

    Assuming:

    • the benchmark interest rate remains at 4.52% for the remaining term of the loan from the 2022 income year onwards
    • Dorothy pays her MYR on 30 June of each year and has paid her 2020 MYR of $175, resulting in a loan balance of $750 on 30 June 2020.

    Dorothy would expect her 2021, 2022 and 2023 MYRs to be:

    Table 1

    Income year

    Loan balance on previous 30 June
    ($)

    MYR
    ($)

    Principal component
    ($)

    Interest component
    ($)

    2021

    750

     

    171

    137

    ($171 − $34)

    34

    ($750 × 4.52%)

    2022

    613

    ($750 − $137)

    171

    143

    ($171 − $28)

    28

    ($613 × 4.52%)

    2023

    470

    ($613 - $143)

    171

    150

    ($171 - $21)

    21

    ($470 x 4.52%)

    Dorothy is unable to pay any of the 2021 MYR due to the COVID-19 situation. The Commissioner makes a decision under section 109RD to disregard the dividend Oz Land Pty Ltd is taken to have paid Dorothy in the 2021 income year, provided Dorothy pays the amount of the shortfall ($171) to Oz Land Pty Ltd by 30 June 2022.

    Payment obligations for Dorothy by 30 June 2022

    To avoid Division 7A dividend consequences, Dorothy will need to pay by 30 June 2022:

    • the amount of the shortfall from the 2021 income year (section 109RD)
    • the 2022 MYR amount (section 109E).

    Calculation of the 2022 MYR

    The 2022 MYR that Dorothy will need to pay is calculated under the formula in subsection 109E(6).

    Dorothy did not pay the 2021 MYR by 30 June 2021. As the loan agreement does not provide for the capitalisation of interest, the unpaid interest on the loan was not capitalised but Dorothy will still be required to pay that interest under the terms of the loan agreement.

    As a result, Dorothy's 2022 MYR is calculated as:

    Table 2

    Income year

    Loan balance on previous 30 June
    ($)

    MYR
    ($)

    Principal component
    ($)

    Interest component
    ($)

    2022

    750

    209

    175

    ($209 − $34)

    34

    ($750 × 4.52%)

    On 30 June 2022, Dorothy will need to pay $348 to meet her obligations for the 2021 and 2022 income years:

    • the 2022 MYR of $209 to avoid a dividend being included in her assessable income for the 2022 income year
    • a further $139 to satisfy the shortfall from the 2021 income year. As Dorothy can count the increase in the principal component of the 2022 MYR (the difference between the principal component in Table 1 and Table 2, $175 − $143 = $32) towards the payment of the shortfall amount of $171, Dorothy only needs to pay the difference ($171 - $32 = $139), which catches up on the shortfall, as a payment for section 109RD.

    Calculation of the 2023 MYR

    Dorothy has paid the shortfall. For calculating the 2023 MYR, the loan balance as at 30 June 2022 will be $470 [$750 less payments made on 30 June 2022 not attributed to interest ($348 − $68 = $280)].

    The 2023 MYR will return to the normal schedule of payments. Dorothy will calculate her 2023 MYR as follows:

    Table 3

    Income year

    Loan balance on previous 30 June
    ($)

    MYR
    ($)

    Principal component
    ($)

    Interest component
    ($)

    2023

    470

    ($750 − $280)

    171

    150

    ($171 − $21)

    21

    ($470 × 4.52%)

    Failure to make the payments by 30 June 2022

    If the shortfall amount is not paid by 30 June 2022, the Commissioner's decision will cease to apply and Dorothy will need to include a dividend in the 2021 income year. If Dorothy does not make at least the 2022 MYR of $209 there could be a dividend in that year.

    Dorothy could at any time apply, outside the streamlined process, for a further extension of time under section 109RD to pay the 2021 and 2022 shortfall amounts to have the dividends disregarded. Alternatively, she could apply to have the dividends disregarded under section 109Q, the reason being that they would cause undue hardship.

    End of example

    See also:

    Instructions

    Section C – Circumstances in which the shortfall has arisen

    Unable to pay

    For the Commissioner to exercise the power, you'll need to confirm that you are unable to pay the MYR by the end of the private company’s 2020–21 income year.

    ‘Unable to pay’ is about cash-flow, not whether there is an excess of assets over liabilities. You'll need to consider:

    • your cash resources
    • money you can readily obtain by realising your assets or using those assets as security to obtain finance.

    For a business, an important question to ask is whether you can pay your way in carrying on your business. For example, a business is unable to pay if it needs to sell its trading stock outside the course of its business to obtain the funds.

    An individual is unable to pay where they need to use the assets necessary to maintain an adequate living standard for themselves and their family to make a payment.

    A partnership is unable to pay if each of the partners are unable to pay.

    A trust is unable to pay if the trustee is unable to pay. This includes by recourse to the trust assets under the right of indemnity.

    Whether you are unable to pay is a question of fact you must determine in a practical business environment. It is a matter of commercial reality taking into account all of the circumstances.

    When completing this form, the practical business environment includes the economic effects and degree of uncertainty that has resulted from the COVID-19 situation. Taking into account these effects, we accept that a borrower can make a practical commercial assessment of factors, including market conditions, relevant to their ability to pay an amount.

    Realising your assets or using assets as security

    You are able to pay an amount if you can readily sell your assets or use them as security to obtain finance. Whether you can readily realise assets within the time required to make a payment depends on factors including the:

    • availability of a market for sale
    • commercial costs of realisation in a short time
    • time required to sell the asset or use it as security
    • interest of joint owners.

    For example, you are able to make your MYR of $30,000 by 30 June 2021 if you own ASX listed shares with a market value of $150,000 and can readily sell them, while having other means to maintain an adequate living standard. The position would be different if the asset was a commercial property. In this case it would be unlikely that you could complete a sale before that date.

    Example 1: Recovering unpaid debts

    Jacqui carries on an accounting business. Due to the COVID-19 situation on her clients, a significant proportion of her invoices for the June 2021 quarter remain unpaid. Jacqui has sent reminder notices but has not taken any further action as she knows these clients are in difficult circumstances. It is reasonable for Jacqui to conclude that the debts owing are not readily realisable assets. It is not necessary for her to take all legally available steps to recover the debts before 30 June 2021 to show this, or to have written the debt off as bad.

    If there are no other resources available to her, Jacqui will be unable to pay her 2020–21 MYR.

    End of example

     

    Example 2: Accessible redraw facility

    Edwin needs to make an MYR of $10,000 by 30 June 2021 and has a home with a market value of $2 million. The property is security for his home loan with an outstanding balance of $500,000 and an available redraw facility of $400,000. Edwin has adequate funds to meet his living expenses and the cost of using the redraw facility to meet his MYR will not affect this.

    Edwin is able to pay his 2020–21 MYR.

    End of example
    Money for business or living expenses

    You are unable to pay an amount if you have to use the money and assets you need to run your existing business or other regular activities. This extends to things which are reasonably necessary to maintain existing activities, including maintaining a portfolio of assets that will sustain your income both during and after the COVID-19 situation. However, it would not extend to other expenses, such as for the future expansion of those activities.

    For an individual, it extends to the activities of others you are responsible for. For example, paying your children's school fees.

    Example 1: Money for business continuity

    The Ferrum Trust experienced a significant reduction in income during the COVID-19 period as the operations of its gym business have been suspended.

    The Ferrum Trust’s practice has been able to maintain a cash balance of $60,000 so it can meet the costs associated with unexpected events encountered in its business. The trust has no other available funds and expects to use its cash balance to meet the temporary cash-flow deficiency of the business. It cannot obtain additional finance. The Ferrum Trust is unable to pay its $15,000 MYR due on 30 June 2021.

    End of example

     

    Example 2: Responsibility for family maintenance

    Con is an employee and a shareholder of Daily Grind Pty Ltd and has a section 109N complying loan from Daily Grind Pty Ltd used to fund a home extension for his growing family.

    While Con's salary from Daily Grind Pty Ltd is fully used to meet his family’s living expenses, he has previously relied on dividends from the company to make his MYR. Due to the COVID-19 situation, Daily Grind Pty Ltd cannot pay Con a dividend in the 2020–21 income year.

    Con is not required to consider his salary which is necessary for the maintenance of his family to establish that he is unable to make his MYR.

    End of example

     

    Example 3: Funds for discretionary costs

    Cath works as an anaesthetist. Due to the reduction in non-essential surgeries resulting from the COVID-19 restrictions, her income for the quarter ending 30 June 2021 has significantly reduced.

    Prior to her unexpected income reduction, Cath budgeted so that she would have sufficient funds available to pay her MYR and also purchase a collection of expensive artefacts to display in her home. However, the reduction in her income means she can no longer make both payments.

    Cath is able to use her funds to pay the 2020–21 MYR. Retaining funds to purchase the artefacts is not an expense necessary to maintain an adequate living standard.

    End of example

     

    Example 4: Payment of previous MYR shortfall

    Anders works in the hospitality industry and has a section 109N complying loan.

    Due to the impacts of COVID-19 during the 2019–20 income year he was unable to pay his MYR in the prior year. Anders applied for, and was granted, an extension to pay the 2020 MYR shortfall until 30 June 2021.

    While Anders' income has been reduced due to the ongoing COVID-19 restrictions and impacts, he will be able to meet his living expenses and pay the lender an amount at least equal to the amount of the 2020 MYR shortfall. He will not however have funds for the total amount he is required to pay by 30 June 2021 that includes the 2021 MYR. 

    Payments required under a previous exercise of the extension under section 109RD would be taken into account in determining whether Anders was able to pay his MYR for the 2020–21 income year.

    End of example
    Unable to pay due to COVID-19

    You'll need to confirm that your inability to pay is a result of the COVID-19 situation. This could be because the COVID-19 situation has directly affected you, or because it has affected another person and there has been a flow-on effect for you. You'll also need to confirm that your inability to pay has not been caused by something else.

    Example 1: Business affected by COVID-19

    Barry provides a shuttle bus service from a regional airport to hotels and resorts. Due to the reduction of customers associated with international and domestic travel restrictions, Barry has temporarily closed his business. He has no other resources to meet his MYR due on 30 June 2021. Barry‘s inability to pay his MYR is a result of the COVID-19 situation.

    End of example

     

    Example 2: Sales affected by COVID-19

    William is the sole shareholder of Lucky News Pty Ltd that operates a newsagency in the CBD. Due to COVID-19, many people who work in the CBD started working from home, and foot traffic in the CBD has reduced considerably. As a consequence, Lucky News Pty Ltd has experienced a significant reduction in sales. William's salary from Lucky News Pty Ltd is fully used to pay for his living expenses and he relies on dividends from Lucky News Pty Ltd to make his MYR. Due to the recent decline in sales, the dividend from Lucky News Pty Ltd can only be used to make part of his MYR resulting in a shortfall. William has no other resources to meet his MYR in full. His inability to pay his MYR in full is due to the COVID-19 situation.

    End of example

     

    Example 3: Guarantor affected by COVID-19

    Fergus is a guarantor to a bank loan for his daughter, Gina, to start her wine bar business in 2019. Gina’s business had to close as a result of COVID-19 restrictions. However, the loan did not qualify for payment deferrals offered by the banks for businesses affected by the COVID-19 situation.

    The bank has since called on the guarantee provided by Fergus. Assuming there are no other resources available to Fergus, he does not have the funds to make his MYR due on 30 June 2021. Fergus is unable to pay his MYR due to the effect of the COVID-19 situation.

    End of example

     

    Example 4: Tests positive for COVID-19

    Anne falls ill and tests positive for COVID-19. She is unable to return to her work as an independent labour hire contractor (i.e. not through a company or trust). As a consequence of her loss of income and with no other resources available to her, Anne is unable to pay her MYR due on 30 June 2021 as a direct effect of COVID-19.

    End of example

     

    Example 5: Inability to pay for reasons other than COVID-19

    Justin started a business in 2018 where he renovated houses for resale at a profit. Despite favourable conditions in the property market during the 2019 calendar year, Justin had been very poor at attracting market interest in any of his renovations and made significant losses in that year. Shortly afterwards he ceased the business.

    As a result of these losses, he is unable to pay his MYR expected to be due on 30 June 2021 relying only on the income stream from his part-time employment. He later contracted COVID-19 and experienced a loss of income from his part-time employment as he was required to self-isolate.

    Justin is not entitled to claim the extension of time under section 109RD using the streamlined approach because he was unable to pay his MYR before he was affected by COVID-19.

    End of example
    Last modified: 28 Jun 2021QC 65994