Question: A dwelling owned by a private limited company is proposed to be leased to its directors and shareholders (the mother and father) for residential use. The property won't be the main home of the parents. They will pay a fair market rent for the property. Is it true that since they are paying market rent, there will be no payment for Div 7A purposes as per section 109CA(11) of ITAA 1936? If the parents aren't company employees, are there any other tax implications from the proposed lease?
Answer: When a company asset like a house is used, ensuring that market value is paid can mean there's no payment for Div 7A purposes. Section 109CA(11) is the relevant provision here. In this case, the rent should be paid monthly at a fair market rate, with yearly reviews of the value. If it's customary in the area, a four to six-week bond should also be included. To prevent unintended Div 7A issues, all utilities should be in the parents' names only.
Another consideration is the potential for Fringe Benefits Tax (FBT). If FBT applies, then Div 7A doesn't. Even if the parents aren't employees, FBT can still apply, especially if they're directors. This is especially true if they receive directors' fees or operate a director's loan account. So, to potentially avoid FBT on the base, it's important to consider all tax implications carefully.