Cracking down on company perks

Written on the 9 September 2009

PERKS such as the use of private company-owned cars, holiday homes and luxury boats will soon be taxed under proposed changes to Australian taxation laws to be introduced into Federal Parliament.

Vincents Chartered Accountants senior associate in taxation and business Solutions, Kim Reynolds, says the proposed amendments would have an impact on small business nationwide.

Reynolds says the proposed amendments would, for the first time, impose tax on the benefits of leasing or licensing private company assets by a shareholder or their associates.

“Proposed changes outlined in May’s federal Budget mean the right to use assets owned by private companies will be treated as deemed dividends under Division 7A of the Income Tax Assessment Act,” she says.

“Currently the right to use assets owned by private companies, effectively provides the shareholder/associate with benefits that they aren’t paying tax on.

“This is a significant change from the status quo and could have far-reaching consequences for the shareholders and directors of private companies. It represents yet another taxation consideration for quite a number of small business people.”

Shadow small business spokesman Steven Ciobo, says the government has carefully worded the proposed changes as an ‘exposure draft’. The federal member for Moncrieff, believes it could potentially run adrift the fragile marine industry here.

“This is a softening up of territories to increase taxes by a government that is steeped in a mountain of debt,” says Ciobo.

“I don’t want to put the cart in front of the horse, but this could potentially be another body blow to the boat building industry on the Gold Coast.”

Kim Reynolds says that under Division 7A certain payments, loans or debt forgiveness by a private company to shareholders or their associates are deemed as dividends.

“The government proposes to extend the coverage of Division 7A to include as payments any benefits arising from a licence or right to use real property (or an interest in real property) or chattels, such as motor vehicles,” says Reynolds.

“This will have an impact on any shareholder or associate making use of a company car, boat or a holiday home for private purposes.”
Reynolds says the government is aware that some private companies permit their shareholders or associates to use company assets as if they were on permanent loan.

“But when similar benefits are provided to employees, they are taxed to the employer through fringe benefits tax,” she says.

Minor or infrequent use of company assets with a notional taxable benefit value of less than $300 would be excluded from the new Division 7A provisions.

“An example of how the proposed changes could be applied would be to consider a private company that owns a beach house valued at $500,000, which it uses to provide training services to staff or clients,” she says.

“Shareholders and their associates may be allowed to use the beach house on weekends at a discount rate of $300 when the charge would normally be $700. Under the proposed amendments, a payment would arise and tax would be paid on the extra $400 that would normally have been paid if the parties were dealing at arm’s length.”


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