Exceptions to payments that arise from provision of an asset for use (other than a transfer of property)
There are some exceptions where the provision of the use of an asset will not be a payment. These exceptions do not apply where the use of the asset is a transfer of property. See Can a right to use property be treated as a payment?
The exceptions are for the minor use of certain company assets, certain payments that would otherwise be allowable as a once-only deduction and the use of certain residences.
The exceptions do not apply to all payments made by the private company. They only apply to 'provision of an asset for use' payments, which do not involve a transfer of property.
An amount is not a payment if the provision of the asset would, if provided in respect of employment of an employee, be a minor benefit under the FBT laws. A minor benefit has a notional value of less than $300. In addition, a number of other matters may be relevant such as the infrequency and the irregularity of the provision of the benefit that may lead to a conclusion that it would be unreasonable to treat the minor benefit as a fringe benefit.
John is a shareholder of a private company that hires out trailers for $250 day. The company owns a number of trailers, one of which it made available to John during the 2009-10 income year to move furniture and other household items.
John is not an employee of the company. However, because the value of his one-off use of the trailer in the income year is less than $300 and his use of the trailer would be treated as a minor benefit under the FBT legislation if he was an employee, the use of the trailer does not constitute a payment under Division 7A.
Otherwise deductible payments
Provision of a company asset for use by a shareholder (or associate) would not be a payment if the shareholder or associate had incurred and paid expenditure for the provision of the asset and a once-only deduction would have been allowable to that shareholder or associate. To determine whether an amount is otherwise deductible it is necessary to test whether the payment for the use of the asset would otherwise be deductible to the user of the asset and not whether the user would be able to deduct the amount had they purchased the asset.
Shop Pty Ltd owns a shopping centre. Audrey is a shareholder of Shop Pty Ltd and at various times during the 2009-10 income year she is provided with part of the property to run a gift wrapping service. Under her arrangement with Shop Pty Ltd, Audrey is not required to make payments to Shop Pty Ltd for her use of that part of the property.
Had Audrey made payments for the use of that part of the property she would be able to deduct those payments, as they would have been part of the expenses she incurred in running her business. Therefore, while Audrey's use of the property is within the scope of the meaning of a payment for Division 7A purposes, it is disregarded as Audrey would have otherwise been able to deduct any payments made for the use of the property.
The exception would not operate if it was established that Audrey had in fact a lease of real property (that is, a transfer of property to an entity within the meaning of that term in Division 7A). The exception is limited to provision of company asset payments that do not involve the transfer of property.
Certain dwellings owned by a private company
There are three separate exceptions for the provision of certain kinds of dwellings.
The first provides an exception for the provision of a dwelling for use by a shareholder (or their associate) where that provision would not meet the otherwise deductible rule because, for example, the use is for private purposes. To qualify for the exception certain conditions must be met:
- the shareholder or their associate is carrying on a business
- the shareholder or their associate uses or has a lease, licence or other right to use land, water or a building for the purpose of carrying on the business
- the provision of the dwelling to the shareholder or associate is connected with that use or with that lease, licence or other right to use the land, water or building to carry on the business.
There must be a connection between the provision of the dwelling and that use, lease, licence or other right to use land, water or building in carrying on a business, even if the business is being carried on by an entity other than the shareholder or their associate living in the dwelling.
Aaron and Liz Jones are shareholders in a private company called Farm Pty Ltd and beneficiaries of the Jones Family Trust. Farm Pty Ltd owns a property called Greenacre on which the Jones Family Trust runs a farming business.
For the 2009-10 income year Aaron and Liz live in a dwelling on Greenacre. Aaron and Liz do not make payments to Farm Pty Ltd for the use of this dwelling.
As this use is for private purposes, it does not come within the otherwise deductible exception.
However, as their use of the dwelling is in connection with the Jones Family Trust using Greenacre to carry on a business, the provision of the dwelling by Farm Pty Ltd is disregarded.
Liz's brother Tom who is also a shareholder of Farm Pty Ltd does the accounts for the Jones Family Trust from his harbour-side dwelling in Sydney. Farm Pty Ltd also owns this dwelling. Tom's use of the harbour side dwelling is not connected to the use of the land, water or building on Greenacre and therefore is not eligible for this exception.
Rebecca is a shareholder of a private company called Health Pty Ltd. She is also a doctor who runs a surgery. Rebecca runs her surgery in a house owned by Health Pty Ltd under a licence agreement. The surgery takes up approximately 40%of the area of the house. Health Pty Ltd has also granted Rebecca a right to use the remaining 60%of the house to live in. She does not pay Health Pty Ltd under either arrangement.
Rebecca's licence to use the part of the house to run her surgery is not a payment because she would have been allowed a once-only deduction if she had made a payment for that use.
Rebecca's use of the remainder of the house is also exempt as she is carrying on a business, using a building that she has been granted a licence to use and there is a connection between her carrying on the business and her using the remainder of the house as her dwelling.
Ernie is a shareholder of a private company called Electric Co Pty Ltd. Electric Co Pty Ltd owns the dwelling that Ernie lives in. Ernie stores his tools at the dwelling, but does not otherwise use the land or building in carrying on his business. Ernie's use of the dwelling is not exempt because he does not use land, water or buildings in carrying on his business. However, the dwelling may be an exempt main residence.
The second residence exception is for the provision of a main residence. This exception relates to a dwelling that is the main residence of the shareholder (or their associate), where the provider of the dwelling is a private company and the private company acquired the dwelling before 1 July 2009. The exception is subject to a continuity of ownership test so that the exception is not carried over if the ownership of the private company changes.
Jessica is the sole shareholder of a private company called House Pty Ltd. The sole asset owned by House Pty Ltd is a dwelling that the private company acquired in 2005. Jessica currently uses this dwelling as her main residence. As long as there is no substantial change in ownership of House Pty Ltd, the company's provision of the dwelling by House Pty Ltd, for Jessica's use is disregarded.
However, in 2012, Jessica sells her ownership interest in House Pty Ltd to Gaurav. The sale of her interest in House Pty Ltd represents a change in the ownership of the company for the purposes of the continuity of ownership test in the tax laws. Therefore if Gaurav seeks to use the dwelling owned by House Pty Ltd as his main residence without paying market value rates, his use of the house will be treated as a payment for the purposes of Division 7A.
Gaurav may then be liable to pay tax (as the company is taken to have paid a dividend to Gaurav) if the payment for the use of the house is not converted to a loan and either repaid before the lodgment day of the private company, or a loan agreement complying with Division 7A requirements is made (and subject to the private company having a distributable surplus).
The third residence exception which is concerned with company title arrangements is for the provision of a dwelling to a shareholder (or their associate) where the dwelling is a flat or home unit that is part of a complex of two or more flats or home units.
The exception applies where:
- the provider of the dwelling is a company that owns a legal or equitable interest in the land on which the complex is erected
- there is more than one share in the company, and each share (whether singly or as part of a parcel of shares) gives the relevant shareholder the right to occupy a flat or home unit in the complex
- each flat or home unit in the complex is covered by a share, or a parcel of shares, in the company
- the dwelling is provided to the entity because a shareholder holds such a share, or parcel of shares
- the company does not have legal or equitable interests in any assets other than legal or equitable interests in:
- the assessable income of the company is derived predominantly from:
The exception does not apply to a case where the interposed entity rules in Division 7A apply.
Jack owns a share in a private company called Property Company, which owns a duplex.
Jack's shareholding gives him the right to occupy part of the duplex. Jack's use of the duplex will not ordinarily be a payment under Division 7A. However, if Jack is also a shareholder of a private company with accumulated profits, Profit Company, and that company makes a payment or loan to Property Company as part of an arrangement to make a payment to Jack, then the interposed entity rules will apply and Jack's use of the apartment will be a payment for the purposes of Division 7A.