Tax Office clarifies position on loans on hold during COVID-19
The ATO has provided clarity on its position on debt forgiveness for Division 7A which may apply to some SMSFs with Division 7A loans.
In a public update, the ATO explained that it considers a debt to be forgiven for tax purposes if generally the debtor is somehow relieved from the legal obligation to repay it or there is evidence that the creditor won’t insist on repayment or rely on the obligation for repayment.
“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,” it stated.
The ATO stated that 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,” it said.
However, if more time is provided to repay a debt due to COVID-19, the ATO stated that this will not result in the debt being treated as forgiven.
SMSF Association technical manager Mary Simmons previously explained that SMSFs with an LRBA with a potential Division 7A issue need to meet both Division 7A criteria and the ATO’s PCG 2016/5 to ensure the loan is not deemed a dividend under Division 7A and is on arm’s-length terms as required under the SIS and Tax Act.
“Essentially, if the lender is a company or even a trust in certain circumstances, unless the loan meets strict criteria which include the need to make a minimum annual repayment, it is at risk of being deemed a dividend,” she said.
The ATO has previously confirmed that where COVID-19 has affected an SMSF’s ability to make the minimum annual repayment required for Division 7A purposes, an online application can be made to the commissioner to request an extension of time to pay any shortfall.
The extension means that a shortfall in the minimum yearly repayment will not be treated as a deemed dividend at the end of the lender’s 2019–20 income year if the shortfall is paid within the extended time.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.