From 1 July 2009, a payment includes:
- the provision of an asset for use by a shareholder or their associate (other than a transfer of property)
- when a company asset is available for use by a shareholder or their associate to the exclusion of the company, but not where there is a general entitlement to use the company's assets
- a right to use assets under a licence or lease, but which does not involve a transfer of property. It does not matter when the right to use the asset is granted.
An asset may also be available for use by a shareholder or their associate:
- without a formal agreement
- where there is no actual use.
The time the payment is made is the first time the asset is used with the permission of the private company.
However, where the right to use a company asset 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.
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.
Example 1 – provision of asset for use by shareholder
On 7 October 2008, 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 became a payment under Division 7A. The payment occurred on 1 July 2009 when the car was first available for Barry's use in the 2010 income year. It does not matter that the agreement was entered into in the 2009 income year, because the provision of the car continues in the 2010 and later income years.
Because Barry has the right to use the car for the whole of 2010, the value of the payment for 2010 is based on 12 months of use. It does not matter that the car was not driven ('used') by Barry every day during the income year.End of example
Example 2 – use of asset to the exclusion of the company
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.End of example
Example 3 – provision of asset for use by shareholder and associates
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.End of example
Example 4 – provision of assets for use by shareholders
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.End of example
Example 5 – provision of asset for use by shareholders but not associates
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.End of example
Example 6 – provision of asset for use by shareholder with amount paid
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.End of example
Exceptions to payments
There are some exceptions that determine the provision of an asset for use (other than a transfer of property) will not be a payment. Those exceptions are:
- for the minor use of certain company assets
- certain payments that would otherwise be allowable as a once-only deduction
- the use of certain dwellings owned by a private company.
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.
Minor use of company assets
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.
Example 7 – provision of asset for use by shareholder that is a minor 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 for a day during the 2016-17 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.End of example
Otherwise deductible payments
Provision of a company asset for use by a shareholder or their associate would not be a payment if the shareholder or their 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.
Example 8 – provision of asset where shareholder allowed once only deduction
Shop Pty Ltd owns a shopping centre. Audrey is a shareholder of Shop Pty Ltd and at various times during the 2016-17 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.End of example
Certain dwellings owned by a private company
There are three separate exceptions for the provision of certain kinds of dwellings by a private company.
- Provision of a dwelling for use by a shareholder or their associate where that provision would not meet the otherwise deductible rule. For example, the dwelling is used for private purposes. To qualify for this exception you must satisfy the following conditions:
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.
Example 9 – provision of asset for use by shareholder that is in connection with carrying on a business
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 2016-17 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.End of example
Example 10 – provision of asset for use by shareholder that is in connection with carrying on a business
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.End of example
Example 11 – provision of asset for use by shareholder that is not in connection with carrying on a business
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.End of example
- Where the provider of the dwelling is a private company, the provision of a dwelling that was acquired before 1 July 2009 and is the main residence of the shareholder or their associate.
This exception is subject to a continuity of ownership test. The exception is not carried over if the ownership of the private company changes.
Example 12 – provision of main residence by a company for use by shareholder
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 2016-17, 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).End of example
- Where 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. This exception applies where:
This exception does not apply if the interposed entity rules in Division 7A apply.
Example 13 – payment to shareholder of associated entity
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.End of example
The value of a payment arising from the provision of an asset for use
If the payment is the provision of the use of an asset not involving the transfer of property, the amount of the dividend is the amount that would have been paid for the provision of the asset by parties dealing at arm's length less any amounts actually paid.
The amount of the payment is nil if the amounts paid equal or exceed the amount that would have been paid by parties dealing at arm's length.
Example 14 – provision of asset for use by shareholder at less than market value
Matt is a shareholder of a private company that owns a holiday home. In the 2016-17 income year, Matt uses the holiday home for one week for which he pays the company 50% less than the market value rent for the property. The market value rent for the property is $1,000 a week. The company has therefore made a payment to Matt of $500, which will be assessable to Matt under Division 7A, subject to the company having a distributable surplus.End of example
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