Leasing Company Owned Property To Shareholders

 

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

 

 

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 is 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 your mother and father only.  The other potential impact is FBT impact. If FBT applies, then there is no Div 7A. Even where your mother and father are not employees, it has still applied FBT when they are directors.  Therefore, in order to avoid FBT, it is important not to provide them with director fees or director loan account.