Holiday house owned by a trust or company

This year's Federal Budget included a small but significant change that widens the definition of what is a “payment” to include the supply of assets at less than market rates to shareholders.

As a result, homes owned by a company that are provided to shareholders for their use are now within the scope of Division 7A (the section of the Taxation Act). The value of that benefit can now become a deemed dividend, taxable to the shareholder.

We find that most holiday houses owned in companies or trusts were put into these entities some time ago. Therefore simply moving the property out of the company would incur a high capital gains tax and stamp duty cost.

In some instances, it may be necessary for a payment to be made to the company to cover the market value of the benefit provided. For example it may be necessary to pay rent to your company for the use of a holiday house owned by the company. The rent will be taxable in the company, and non-deductible to you.

While the provisions relate primarily to companies, trusts can also be caught up in Division 7A if they have made a distribution to a company that remains on the balance sheet as an unpaid entitlement.

The provisions are yet to be passed into law, and are the subject of a Treasury discussion paper that may result in some changes to the proposed legislation. However if you would like to discuss this in the meantime, please contact us.

Published : 19 August 2009