• Payments

    23. What does Division 7A define to be a payment?

    In Division 7A a 'payment' is defined to mean:

    • a payment to the extent that it is made to, for the benefit of, or on behalf of a shareholder or shareholder's associate
    • an amount to the extent that it is credited to, on behalf of, or for the benefit of a shareholder or shareholder's associate, and
    • a transfer of property to a shareholder or shareholder's associate.

    (See subsection 109C(3).)

    From 1 July 2009 the definition of 'payment' was extended to also include the provision of an asset for use (other than a transfer of property) by a shareholder or shareholder's associate. Certain exceptions apply for minor use of company assets, certain payments that would otherwise be allowable as once only deductions and the use of certain residences but only where the provision of the asset is not a transfer of property to the entity. See question 24.

    (See section 109CA.)

    24. Under what circumstances will the provision of assets for use not be a payment?

    There are a number of exceptions that apply where a company provides an asset for use by a shareholder or associate and that use does not involve the transfer of property.

    The following use is excepted and will not constitute a payment:

    • if done in respect of the employment of an employee, it would constitute a minor benefit under section 58P of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) (see subsection 109CA(4))
    • if the taxpayer had paid for the use of the asset, that payment would have been deductible (the 'otherwise deductible rule') (see subsection 109CA(5))
    • where the asset is a dwelling that is used in connection with a business, subject to certain conditions being met (see subsection 109CA(6))
    • where the asset is a main residence that was purchased prior to 1 July 2009 and the company satisfies a continuity of ownership test (see subsection 109CA(7))
    • where there is a provision of a dwelling and the dwelling is a flat or home unit that is part of a complex of two or more flats or home units, provided certain conditions are met.

    (See subsection 109CA(7A).)

    25. Can a 'right to use' property be treated as a payment for Division 7A purposes?

    Yes. A 'right to use' property can be a payment for Division 7A purposes where that right involves a transfer of property.

    Example: a right to use real property that is made by way of a lease involves a transfer of property to the lessee and is a payment for Division 7A purposes.

    From 1 July 2009, use of a property which does not involve a transfer of property can also be a payment for Division 7A purposes.

    Example: the granting of a licence which does nothing more than provide a mere permission to enter onto and use real property is not a transfer of property however it may be a payment for Division 7A purposes from 1 July 2009.

    (See subparagraph 109C(3)(c) and subsection 109CA(1).)

    26. What is the difference between a lease of real property and a licence of real property?

    A lease of real property is a transfer of property for the purposes of Division 7A whereas a licence of real property is not a transfer of property. A right to use property made by way of a lease is a transfer of property because it confers an interest in the property by way of the provision of exclusive possession of the premise to the lessee. Usage of an asset under a licence or an informal right to use does not involve a transfer of property as it merely provides permission to an entity to use an asset.

    (See subparagraph 109C(3)(c) and subsection 109CA(1).)

    27. Are there any circumstances where a transfer of property will not be a payment?

    No. Although there are some exceptions where the provision of an asset for use will not be a payment, the exceptions do not apply to payments which involve a transfer of property. Some private company payments will not be treated as dividends. See question 24.

    (See subsection 109CA(9).)

    28. What is the amount of a payment made by a transfer of property?

    The amount of such a payment is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee. If the consideration given by the transferee equals or exceeds the arm's length value of the property, the amount of the payment is nil.

    (See subsection 109C(4).)

    29. What is the amount of a provision of an asset for use payment that is not a transfer of property?

    The amount of the payment is the amount that would have been paid for the provision of the asset by parties dealing at arm's length less any consideration actually paid. The amount of the payment will be nil if the consideration equals or exceeds the amount that would have been paid by parties dealing at arm's length.

    (See subsection 109CA(10) and subsection 109CA(11).)

    30. How do I work out the arms length value for the purposes of Division 7A?

    'Dealing at arms length' means that the parties to the transaction are dealing with each other in a manner as independent parties would normally do, so that the outcome of their dealing is a matter of real bargaining. An important element of an arms length transaction is that the parties have acted severally and independently in forming their bargain so that there is no question of a conflict of interest.

    Although the ATO is not in a position to provide advice on how to work out an arm's length value, the fact sheet Market valuation for tax purposes may assist.

    31. Can a loan be a payment?

    No. Loans are expressly excluded from the meaning of payment for Division 7A purposes.

    However, from the income year in which 1 July 2006 occurred, a payment can be converted to a loan before the private company's lodgment day.

    If a payment is converted to a loan before the private company's lodgment day it is then treated as a loan for Division 7A purposes.

    (See subsection 109C(3A) and subsection 109D(4A).)

    32. What private company payments are not treated as dividends?

    The following private company payments are not treated as dividends:

    • a payment, including a fringe benefit, made to a shareholder or shareholder's associate in their capacity as an employee or associate of an employee
    • a payment to the extent that it discharges an obligation of the private company to pay money to the shareholder or shareholder's associate and is not more than would have been required to discharge the obligation had the two parties been dealing with each other at arm's length
    • a payment to another company, otherwise than in its capacity as trustee, unless the company is an interposed entity to which Subdivision E applies
    • a payment that is otherwise assessable or specifically excluded from assessable income
    • a distribution by a liquidator in the course of winding-up the company.
    • if it was made on or after 23 June 2009 to a CGT concession stakeholder under subsection 152-325(1) of the Income Tax Assessment Act 1997 (a retirement exemption payment)
    • for provision of asset payments (other than transfer of property), minor use of company assets, certain payments that would otherwise be allowable as once-only deductions and the use of certain residences. See question 24.

    A payment made in the income year in which 1 July 2006 occurred, and following income years, may be converted into loan and have the Division 7A provisions relating to loans apply.

    (See subsection 109ZB(3) and 109D(4A) and sections 109J, 109K, 109L, 109NA and 109X(1).)

    33. Can a payment made by a private company because of a maintenance order of the Family Court be a payment made for Division 7A purposes?

    Yes. The payment made by the private company is a payment for Division 7A purposes because it is made on behalf of, or for the benefit of, the parent or spouse subject to the order. Alternatively, it may be a payment because it is made to the person entitled to receive payment under the order. This depends on the nature of the order.

    In either case, the exemption provided by section 109J for payments that discharge obligations of the private company does not apply. This is because the order is not an obligation of the private company for the purposes of this exemption. The order is an obligation of the parent or spouse subject to the order.

    From the income year in which 1 July 2006 occurred, a private company may frank a deemed dividend that arises because of a family law obligation. Franking can apply in the same circumstances as CGT roll-over relief applies to spouses, consistent with section 126-5 of the ITAA 1997.

    (See section 109RC and the definition of family law obligation in section 109ZD.)

      Last modified: 14 Sep 2010QC 16852