Div 7A past amendment periods might allow you to get out of jail tax-free.
Div 7A Past Amendment Periods
Before the end of an amendment period a loan to a shareholder is a Div 7A problem. But Div 7A past amendment periods might no longer be the problem you once had.
In this episode Andrew Henshaw of Velocity Legal in Melbourne will tell you what happens when you can no longer amend individual tax returns that should have included a deemed Div 7A dividend.
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Div 7A Past Amendment Periods
Let’s say on 30 June 2020 your company gave you as its sole shareholder a $1m loan. Sounds great since no wage or dividend and hence no tax, right? Not quite.
Lodgement Day
You need to repay this loan by the lodgement day. Lodgement day is a really important concept. It is the date on which your company’s tax return is lodged or when it is due to be lodged, whichever is earlier.
So if you need the cash and want to pay back as late as possible, lodge just before the due date of your company’s tax return. Your tax agent will be able to tell you when exactly that is.
But for now let’s assume that your 2020 company tax return was due on 25 May 2021 and you lodged on 20 May 201. So your lodgement day is 20 May 2021.
Div 7A
With a lodgement date of 20 May 2021, you should have repaid this loan by May 20th to avoid a Div 7A issue. But let’s say you didn’t.
So you had a Div 7A issue and were meant to include an unfranked deemed dividend of $1m in your 2020 tax return. But let’s say you didn’t do that either.
Amendment Period
So now amendment periods enter the stage. An amendment period is the period during which you as well as the ATO can still change your tax return. This is a really important concept for the problem you have.
Your amendment period as an individual is two years unless you are the potential beneficiary of a trust (plus a few other exceptions). Let’s say none of your relatives has a trust that includes you as a potential beneficiary. So your amendment period ends two years after the date the Notice of Assessment (NOA) is issued.
Let’s assume the ATO issued a NOA for your 2020 company tax return on 20 July 2021. So your two-year amendment period ends on 20 July 2023 unless there is fraud and evasion.
Fraud and Evasion
Fraud and evasion is a problem. If you knew that you should have included the franked dividend in your tax return, but explicitly didn’t hoping that the amendment period will save you, then this is most likely fraud and evasion. And in the case of fraud and evasion, the amendment period is indefinite.
So for now let’s assume that you can prove to the ATO that you didn’t know and just had an imcompetent tax agent who made a mistake. So your amendment period is still 2 years.
Want to Amend
So now it is after 20 July 2023 and you get a new tax agent, who realises the mistake your previous accountant made. And so they want to do the right thing and amend your 2020 company tax return to include the unfranked deemed dividend of $1m. Which by the way will cost you about $470k in tax.
But they can’t, since the amendment period has passed. So no amendment, no unfranked deemed dividend and no tax to pay.
Debt forgiveness
Your company still has a receivable of $1m against you, but you are not going to repay the loan. Why should you?
So now the company forgives the loan and that is income under s109F ITAA97 as the forgiveness of a debt. But this debt was already income under s109D ITAA97 – you just couldn’t recognise it anymore since the amendment period had passed.
So s109G comes to your rescue. It says that if you already had income under s109D, then you are not obliged to recognise the income again under 109 F. And hence you never recognise this loan as income.
Commercial Loan
Things would be different if this was a commercial loan. Then the commercial loss provisions would apply. However, there is no agreement between you and the company – you just took the cash – and there is no interest income, so unlikely to qualify as a commercial loan.
Tax Deduction
Can the company claim a tax deduction for the write-off of the loan? Most likely not – for the same reasons the loan isn’t a commercial loan. There is no agreement and no interest so the write-off is not in connection with any income. So you don’t get a tax deduction.
And anything else would be too good to be true anyway. You already get a huge tax saving by not having to pay any tax on the $1m. If you then also got a tax deduction, that would be a massive double-dipping.
So this is what we took away from the interview. But please listen in as Andrew explains this much better than we ever could. And we might have gotten something wrong when writing our notes – so please listen to the actual interview.
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