| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your private ruling
Authorisation Number: 1012530409120
Ruling
Subject: PBR - IT - Division 7A and pre-payment of rent
Question 1
Will the pre-payment of rent for a property owned by a shareholder be treated as a dividend under Division 7A of the Income Tax Assessment Act 1936?
Answer
No.
Question 2
Is the taxpayer able to apportion the pre-paid rent over the period of the lease to which it relates, deducting each portion in the income year to which the portion of the pre-payment relates?
Answer
No; however, the taxpayer may deduct the pre-paid amounts in accordance with section 82KZMD of the Income Tax Assessment Act 1986.
This ruling applies for the following periods:
Year ended 30/06/2014
Year ended 30/06/2015
Year ended 30/06/2016
The scheme commences on:
01/07/2013
Relevant facts and circumstances
1. The taxpayer will enter into a lease agreement for a property.
2. The taxpayer will conduct its business from the leased property.
3. The owner of the property holds shares in the taxpayer.
4. The term of the lease has not been by the parties. It is planned that they would obtain the advice of an independent valuer to ensure that the chosen term of the lease is at arm's length.
5. Under the terms of the draft lease the taxpayer may elect to pre-pay the rent. If the taxpayer makes this election then the parties to the agreement will engage an independent valuer to determine the amount that is to be pre-paid. Clause 2 of the draft lease agreement states:
6. The taxpayer plans on pre-paying the rent for the entire term.
7. Per the draft lease agreement, should the lease be terminated during a period for which the lessee had pre-paid the rent the pre-payment will be refunded to the lessee on a pro-rata basis.
8. The taxpayer is not a small business entity per section 328-110 of the Income Tax Assessment Act 1997.
Relevant legislative provisions
Division 7A of the Income Tax Assessment Act 1936
Section 109C of the Income Tax Assessment Act 1936
Section 109D of the Income Tax Assessment Act 1936
Section 109J of the Income Tax Assessment Act 1997
Section 8-1 of the Income Tax Assessment Act 1936
Section 82KZL of the Income Tax Assessment Act 1936
Section 82KZMA of the Income Tax Assessment Act 1936
Section 82KZMD of the Income Tax Assessment Act 1936
Reasons for decision
Question 1:
Will the pre-payment of rent for a property owned by a shareholder be treated as a dividend under Division 7A of the Income Tax Assessment Act 1936?
The Commissioner has ruled in favour of the taxpayer in relation to this question.
Question 2:
Is the taxpayer able to apportion the pre-paid rent over the period of the lease to which it relates, deducting each portion in the income year to which the portion of the pre-payment relates?
The Commissioner has made a ruling unfavourable to the taxpayer in relation to this question, however the Commissioner has drawn the taxpayers attention to the operation of section 82KZMD of the Income Tax Assessment Act 1986 and that, on the facts provided, it would apply to the pre-payment that is the subject of this question.