Can the use of assets (other than a transfer of property) be treated as a payment?
The definition of payment has been extended to include the provision of an asset for use by a shareholder or their associate. For example, this includes a right to use assets under a licence or lease, but which does not involve a transfer of property. The extended definition of payment is to ensure that arrangements aimed at circumventing the operation of Division 7A, through the provision of an asset under a licence or other right to use, are now within the scope of Division 7A.
The extended definition applies to payments made on or after 1 July 2009.
The time the payment is made is the first time the asset is used with the permission of the private company. However, if the right to use continues into another income year then the provision of the asset for use in the subsequent year is treated as being a separate payment made at the start of that year.
Under the extended definition of payment, a payment may also occur when a company asset is available for use by a shareholder or their associate to the exclusion of the company. In these circumstances it does not matter when the right to use the asset is granted.
On 7 October 2006, Ngo Pty Ltd leases a car for five years and then provides the car to Barry, a shareholder, to use for the duration of that period. Barry pays Ngo Pty Ltd $5,000 a year for the use of the car. After 1 July 2009, the provision of this car will be a payment under Division 7A. The payment will occur on 1 July 2009 when the car is first available for Barry's use in the 2009-10 income year. It does not matter that the agreement was entered into in 2006 because the provision of the car continues in the 2009-10 income year. Because Barry has the right to use the car for the whole of 2009-10 the value of the payment for 2009-10 is based on 12 months of use. It does not matter that the car is not driven ('used') by Barry every day during the income year.
An asset may be available for the use of a shareholder or their associate without a formal agreement. An asset may also be available for use even if there is no actual use.
Brian is a shareholder of a private company that owns a luxury yacht. He does not have a formal agreement with the company in relation to the yacht however he takes the yacht out every second weekend. Brian keeps the yacht at the company's business premises, but takes the key home. Brian stores several personal items on the yacht.
Brian's fortnightly use of the yacht is a payment under Division 7A. The availability of the yacht for Brian's use is also subject to Division 7A because the yacht is not readily available for use by the company. The company would need to arrange with Brian to get the key and for the removal of Brian's personal items before using the yacht. That is, the asset is available for Brian's use to the exclusion of the company.
Marina is a shareholder of a private company that owns a city apartment. The apartment is generally available for rent. However, Marina asks the company not to rent the apartment out for a week so that she and her family can use it over a long weekend. Marina's use of the apartment is a payment for the purposes of Division 7A.
If there is merely a general entitlement to use the company's assets, an asset is not available for the use of a shareholder or their associate to the exclusion of the company.
Peter is a shareholder of a private company that owns five cars for company use. Shareholders and their associates have general permission to use the cars on weekends if they are not being used for company business. Peter regularly takes one of the cars home.
Peter's use of the car that he takes home will be subject to Division 7A. This will include driving the car (actual use) and the availability of the car for his use to the exclusion of the company, such as when it is parked at home, or at a restaurant that Peter is visiting.
Although Peter may have general permission to use all five of the cars, he does not use all of them for the purposes of Division 7A. The four cars that Peter leaves at the company premises are available for the company to loan to another shareholder, employee, customer, or other party. That is, these cars are not available to Peter to the exclusion of the company.
If a company asset is used by more than one entity simultaneously it is necessary to consider whether the use of that asset should be attributed to a particular entity or apportioned.
Clare and her husband Martin are shareholders of a private company that owns a holiday house. Clare, Martin and their infant son Phoenix have a one-month holiday at the house over summer. They do not pay for the use of the holiday home.
Although Phoenix is an associate of Clare and Martin, the provision of the use of the asset is attributable to Clare and Martin. This is the case particularly because Phoenix has no power to enter into a contract with the company and because of his dependence on Clare and Martin. The company is not providing the holiday house to Phoenix for his use, and his incidental use of the house is secondary to that of Clare and Martin.
The use of the holiday house can therefore be attributed to Clare and Martin in equal shares on the basis that they use the holiday house equally.
Hayden is a shareholder of a private company. Hayden leases a car from the private company for 12 months for a nominal amount of $10,000. Hayden uses the car to drive his children to school in the morning. Hayden's wife (who is also a shareholder) sometimes drives the car on weekends.
The use of the car is attributable to Hayden's relationship with the company. The use of the car by Hayden's spouse and his children is secondary to his right to use the asset and is not provided by the company for their use, but Hayden's.
Hayden is assessed on the market value of the use of the car for the full 12 months, less actual consideration paid.