Edited version of private advice

Authorisation Number: 1052095729929

Date of advice: 10 March 2023

Ruling

Subject: Transfer of property under lease agreement

Question 1

Does the lease of the property by Company A to Partnership B constitute the transfer of property for the purposes of paragraph 109C(3)(c) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

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

Question 2

Should the answer to Question 1 be 'no', did the lease of the property constitute theprovision of an asset by Company A for use by Partnership B for the purposes of section 109CA(1) of ITAA 1936?

Answer

N/A. The answer to Question 1 is yes. The lease of the property is considered a transfer of property under paragraph 109C(3)(c).

Question 3

Should the answer to Question 2 be determined to be 'yes', does subsection 109CA(5) of the ITAA 1936 apply to disregard the payment under subsection 109CA(1)?

Answer

N/A. The answer to Question 2 is not yes. The exception in subsection 109CA(5) only applies to the extended meaning of payment in subsection 109CA(1).

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A is a private company incorporated on a specified date.

Partnership B is a partnership between various related parties.

The shareholders of Company A are amongst the partners in Partnership B.

Company A owns a property.

Company A and Partnership B executed a lease agreement in 20XX for the property.

The lease agreement was effective from 20XX.

The lease agreement is for a 10-year term and commences in 20XX and ends in 20XX.

Subject to a specified clause in the lease agreement the lease can be renewed at the end of the current term and can be renewed a total of xx times.

At a specified clause in the lease agreement Partnership B is required to pay annual rent. The annual rent payable is $xx.

The annual rent payable is below market value.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1936 subsection 109C(3)

Income Tax Assessment Act 1936 paragraph 109C(3)(c)

Income Tax Assessment Act 1936 subsection 109C(4)

Income Tax Assessment Act 1936 section 109CA

Income Tax Assessment Act 1936 subsection 109CA(5)

Reasons for decision

As per paragraph 109C(3)(c) of the ITAA 1936 a payment includes a transfer of property.

Tax Laws Amendment (2010 Measures No. 2) Bill 2010 Explanatory Memorandum states at paragraph 1.6 for a payment to arise under a 'transfer of property' the ownership of an asset needs to pass from the private company to the shareholder (or their associate), or there must be a lease of real property in existence.

At paragraph 1.16 it states the meaning of 'payment' in subsection 109C(3) includes a transfer of property to an entity, which entails the ownership of an asset passing to a shareholder or their associate, and a lease of real property to an entity, and that the meaning of 'payment' is extended to include the provision of an asset for use by an entity under section 109CA of the ITAA 1936.

The fact a lease of real property is considered a transfer of property under paragraph109C(3)(c) is further solidified in example 1.9 of the same Explanatory Memorandum. In this example a shareholder, Audrey, used part of a property, under no lease, to operate a gift-wrapping service. This example was provided to show how the exemption under subsection 109CA(5) would apply to the provision of an asset under section 109CA and would not apply to a transfer of a property for the purposes of paragraph 109C(3)(c). Crucially, the example states 'The exception in 109CA(5) 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 paragraph 109C(3)(c))'.

In your case there is a lease of real property between Company A and Partnership B.

This lease is considered a transfer of property under paragraph 109C(3)(c) and thus a payment under section 109C of the ITAA 1936.

Under subsection 109C(4) the amount of a payment consisting of a transfer of property 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 for the transfer.