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Division 7A & FBT

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Q: A dwelling house is owned by a proprietary limited company in recently. It is proposed that the company would lease the property to its directors and shareholders (mother and father) for use as a residence. In case it is relevant, the property would not be the mother and father’s principal place of residence. The mother and father would pay an arm’s length market rental for the use of the property. Does it correct that while the provision of the residence would constitute a payment for Div 7A purposes, whenever an arm’s length market rental is paid, the amount of the payment is nil under s 109CA (11) of ITAA 19367? If the mother and father are not employees of the company, is there any other revenue consequence arising from the proposed residential lease?

 

A: Where a company asset is used, it is possible to ensure market value is paid for that use and therefore have a nil value for Div 7A purposes. Section 109 CA (11) is the correct provision. In factual circumstances is that the rent be paid monthly in advance with annual market value reviews. Depending upon the locality, if it is usual to have a four or six-week bond arrangement, then that should be included as well. To protect against other inadvertent Div 7A issues, all utilities should be in the names of the mother and father only. The other potential impact is FBT impact. If FBT applies, then there is no Div 7A. Even where the mother and father are not employees, it has still applied FBT when they are directors. This is particular so where the mother and father receive directors’ fee or where they operate a director’ loan account. Therefore, in order to be able to avoid FBT on the base

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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