Non-commercial loans – tightening the rules
The expanded application of the Income Tax Assessment Act 1936 - Division 7A (Cwlth) announced in the 2009/2010 Federal Budget has been made law. Central to the changes is the ability for the ATO to tax the use of private company assets by shareholders or their associates.
Most would be aware of the implications of loans made by a private company to its shareholders and/or their associates. The use of other assets held by private companies such as property, vehicles and boats, either for free or for a non arm’s length value by the shareholders and/or their associates has remained largely unchecked.
Changes to Division 7A allow for a deemed ‘payment’ to be included in the shareholder’s income and taxed accordingly. It would represent the amount they would have had to pay to use the asset.
Where a shareholder and/or associate has exclusive use of such an asset, the deemed payment amount would be equivalent to what would be required to be paid to secure that exclusive use. For example, consider a holiday home held by a private company for the exclusive use of a shareholder and their family. The home may only be used for three months of the year but as it is not available for any other party to use, the deemed payment amount would be equivalent to commercial rent for the entire year.
As originally announced in the 2009/2010 Budget, these changes apply from 1 July 2009. It is crucial you talk to your Chartered Accountant about reviewing your situation if you hold such assets in a private company.