Is there a problem with using your company’s assets for yourself? Assets that belong to your business, but which are used for your own benefit or enjoyment, can potentially trigger a tax issue known as “Division 7A”.
Running your business as a company often makes sense in order to get the “asset protection” advantages of a corporate veil. However, when most of the directors are family or friends, company decisions can easily be skewed to benefit individuals. This may not be intentional; as a business owner you may think of company assets as your own.
However, the usual corporate tax rate is 30%, and the highest individual margin rate is 49%. Division 7A is designed to prevent any tax mischief that might result from the significantly lower company tax rate.
What is Division 7A?
Division 7A treats a “payment” or other benefit provided by a private company to a shareholder (or their associate) as a payment for income tax purposes. This measure can apply even if the recipient treats the transaction as a gift, or a loan, or the waiving of a debt.
The Division 7A net is wide, and may potentially catch many transactions that do not involve a distribution of profits, such as using a company’s assets for private enjoyment. This is especially the case since the definition of “payment” was expanded to include the provision of assets.
What if I use company assets for personal use?
Division 7A will most likely apply. Real, tangible company assets are usually the biggest exposure that you may have to Division 7A without realising it.
An example would be a holiday house that is owned by a company but is used by a shareholder of that company. The value of this use, under Division 7A, can be deemed to be a dividend and form part of the shareholder’s assessable income.
However, there are certain exemptions that can apply – for example, if the house was being used as a main residence. Check with us for further information.
What about motor vehicles for personal use?
Another fairly common example concerns motor vehicles. They are actually most likely caught by fringe benefits tax (FBT) rather than Division 7A because those vehicles are typically provided to directors in their capacity as employees, despite those directors also being shareholders (see more below). This starts getting quite complex, so please talk to us if you have motor vehicles used in this manner by shareholders, directors and employees.
One of the results from the ATO’s recent ramping up of its data matching activities has been an increased triggering of both Division 7A and FBT provisions after vehicles registered to businesses were found to be used privately by, respectively, shareholders or employees.
Other issues to consider when using business assets
If your transactions are subject to Division 7A, you may also need to consider some other areas of tax, such as FBT, issues related to share dividends, or family law.
Fringe benefits tax
Division 7A does not apply to payments made to shareholders or their associates in their capacity as an employee or as an associate of an employee of a private company. However, such payments may be subject to FBT.
On the other hand, Division 7A does apply to loans and debt forgiveness provided to shareholders or their associates, even where the benefits are provided in their capacity as an employee or as an associate of an employee. To avoid double taxation, such benefits are not subject to FBT.
Dividend imputation, franking credits
Payments and other benefits taken to be Division 7A dividends are generally unfrankable distributions unless they are provided under a family law obligation. However, the ATO has a general discretion to allow a Division 7A dividend to be frankable if it arises because of an honest mistake or inadvertent omission.
Payments and other benefits provided by a private company to shareholders or their associates as a result of divorce or other relationship breakdowns may be treated as Division 7A dividends and are assessable income. However, such payments or other benefits are treated as frankable dividends if provided under a family law obligation, such as a court order, a maintenance agreement approved by a court under the family law act, or court orders relating to a de facto marriage breakdown.