Private ruling: PBR - IT - Division 7A and pre-payment of rent
Published: October 2013
Ruling period: Year ended 30/06/2014 | Year ended 30/06/2015 | Year ended 30/06/2016
Date scheme commenced: 01/07/2013

Ruling: Q1: 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 ? | A1: No. | Q2: 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? | A2: No; however, the taxpayer may deduct the pre-paid amounts in accordance with section 82KZMD of the Income Tax Assessment Act 1986 .

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: Detailed Reasoning - 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. | Detailed Reasoning - 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.