Private ruling: Income Tax: Division 7A
Published: June 2012
Ruling period: Financial year ended 30 June 2013 | Financial year ended 30 June 2014 | Financial year ended 30 June 2015 | Financial year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Does subsection 109CA(11) of the Income Tax Assessment Act 1936 (ITAA 1936) operate in order that the value of the "payment" by the taxpayer will be nil? | A1: No. Subsection 109CA(11) of the ITAA 1936 will not operate to make the value of the "payment" nil.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. A private company is considering entering into a Lease Agreement for the property that is owned by the trustee for the Unit Trust, who are the shareholders of the private company. There is currently no building on the land and it is proposed as a part of the terms of the lease that the private company will fund and organise construction of a building on the land. The private company will rent the building from the trustee at the market value rent. As the private company - the lessee will be funding construction of the building on the land, there will be no rent payable in respect of the building.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 subsection 109C(1) | Income Tax Assessment Act 1936 subsection 109C(3) | Income Tax Assessment Act 1936 subsection 109C(4) | Income Tax Assessment Act 1936 section 109CA | Income Tax Assessment Act 1936 subsection 109CA(1) | Income Tax Assessment Act 1936 subsection 109CA(3) | Income Tax Assessment Act 1936 subsection 109CA(10) | Income Tax Assessment Act 1936 subsection 109 CA(11) | Income Tax Assessment Act 1936 section 109ZD | Income Tax Assessment Act 1936 section 318

Reasons for decision: Summary: The provision of the building by the trustee of the Unit Trust to the taxpayer as per the lease agreement will not be considered as use "payment" under section 109CA of the ITAA 1936. Accordingly, subsection 109CA(11) of the ITAA 1936 will not operate in order that the value of the "payment" (that will be paid by the taxpayer to the trustee of the Unit Trust for the construction of a building) be nil. Further, the construction cost that will be paid by the taxpayer to the trustee of the Unit Trust will be considered as payment under section 109C of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under subsection 109C(1) of the ITAA 1936 an amount paid by a private company to a shareholder in a private company, or an associate of such a shareholder, during a year of income is taken to be a dividend. Section 109ZD of the ITAA 1936 states that 'associate' has the meaning given by section 318 of the ITAA 1936. An 'associate' of a natural person (other than in the capacity of trustee) includes a relative of the natural person under paragraph 318(1)(a) of the ITAA 1936. Subsection 109C(3) of the ITAA 1936 defines a 'payment' to include a transfer of property to the shareholder of the private company, or an associate of such a shareholder. In the case of a transfer of property to an entity, the amount of the payment is deemed to be the amount that would have been paid by arm's length parties, less any consideration actually given by the transferee. If such consideration equals or exceeds the arm's length amount, the amount of the payment is taken to be nil under subsection 109C(4) of the ITAA 1936. A transfer of property is taken to be a payment and a dividend for the purposes of section 109C of the ITAA 1936 if the transfer of property is to the entity (ie to the shareholder or an associate of the shareholder). However, transfers to a third party do not give rise to a payment subject to section 109C of the ITAA 1936, unless the third party is an interposed entity and the transaction triggers the operation of Division 7A; Subdivision E of the ITAA 1936. The concept of a payment to an entity for the purposes of Division 7A of the ITAA 1936 was extended with effect from 1 July 2009 to include the provision of an asset for use by the entity (eg a licence to use a boat, car or holiday home) under subsection 109CA(1) of the ITAA 1936. The effect of section 109CA of the ITAA 1936 is to expand the range of financial benefits (which include payments, loans or forgiven debts) that can be deemed to be a Division 7A of the ITAA 1936 dividend under section 109C of the ITAA 1936. Subdivision D of Division 7A of the ITAA 1936 sets out the rules about payments and loans that are not treated as dividends. However, the exclusions in Subdivision D do not prevent the private company from being taken to pay a dividend to a shareholder for a use payment under section 109CA of the ITAA 1936. If a use payment is made after 1 July 2009, the payment is taken to be made when the recipient first uses the asset or first has a right to use the asset on an exclusive basis under subsection 109CA(2) of the ITAA 1936. Then, a new use payment is made at the start of each income year in which the asset continues being used. The amount of a use payment is the arm's length consideration for the provision of the asset less any consideration actually paid. If the consideration paid equals or exceeds the arm's length amount, the amount of the payment is nil under subsections 109CA(10) and (11) of the ITAA 1936. For example, the amount of a use payment constituted by the provision of a holiday home would be the market value rent for the home for the period of use, less any payment made by the shareholder or associate for the use of the property. As per the above information, Division 7A of the ITAA 1936 will arise when a private company provides an asset to a shareholder, or an associate of the shareholder for use. Further, paragraph 1.7 of the Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No2) Bill 2010 (the EM) states that: 1.7 As part of the 2009-10 Budget, the Government announced that it would tighten the non-commercial loan rules to improve fairness and integrity in the tax law, by ensuring that benefits provided by a private company to a shareholder (or their associate), through the use of company assets, such as holiday houses, cars and other luxury items, at less than market value would be taxable. The Government also announced that it would make a number of other technical amendments to Division 7A to ensure that it operates in accordance with its original policy intent. Also paragraph 1.24 of the EM states that: 1.24 The amount of a payment is the amount that would have been paid for the provision of the asset by parties dealing at arm's length less any consideration actually paid. The amount of the payment is nil if the consideration paid equals or exceeds the amount that would have been paid by parties dealing at arm's length. Example 1.7 Matt is a shareholder of a private company that owns a holiday home. In the 2009-10 income year, Matt uses the holiday home for one week for which he pays the company 50 per cent 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 an amount of $500, which will be assessable to Matt under Division 7A, subject to the company having a distributable surplus. Accordingly, the effect of section 109CA of the ITAA 1936 will be considered for an arrangement where a private company owns an asset and provide the asset for the use of a shareholder or an associate of the shareholder of a private company. In this case the shareholders of the taxpayer are the shareholders of the trustee of the Unit Trust (the lessor). Therefore, the shareholders are the owners of the land (and any buildings on it). Under the lease agreement, the taxpayer (the lessee company) - the private company is proposing to construct a building on the land owned by the lessor in exchange for not having to pay rent over the 25-year term of the lease. The lessor's ownership of the asset is explicitly recognised in clause 25.1 of the lease agreement. So, the lessor is providing an asset (land and buildings) for use by the lessee during the term of the lease and, at the end of the lease, the property simply reverts to the lessor as owner of the asset. Therefore, provision of the building by the trustee of the Unit Trust to the taxpayer as per the lease agreement will not be considered as use "payment" under section 109CA of the ITAA 1936. Accordingly, subsection 109CA(11) of the ITAA 1936 will not operate in order that the value of the "payment" (that will be paid by the taxpayer to the trustee of the Unit Trust for the construction of a building) be nil. Further, the construction cost that will be paid by the taxpayer to the trustee of the Unit Trust will be considered as payment under section 109C of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA, or any other anti-avoidance provision, apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax .