Following consultation with key bodies, the Government has released details of the 2009-10 Budget measure to tax private company shareholders on the private use of their company’s assets.

The measure will extend the private company deemed dividend rules to apply to shareholders and their associates using company assets, such as providing access to holiday houses, boats and other items, which are then priced at less than market value. For example the use of a company owned house would be deemed to be a dividend paid to the shareholder. The dividend would be the difference between the market value of the rent and the amount paid by the shareholder/associate.

Use of certain assets now to be excluded from the new rules

Following public consultation the measures have been changed to prevent the use of houses on business property (typically farming/pastoral businesses) and the use of company assets in a business being taxed as a dividend. To achieve this the measures will now include:

• an "otherwise deductible rule" – any "business use" assets (that is, assets that are not used for private purposes) provided to a shareholder under a right-to-use or a licence (but not a lease of real property) will be disregarded from the amount of any "payment" made to shareholders as they will be treated as otherwise deductible.
  
  Example: "payments" made to farmer-shareholders that involve the provision of farmland that is owned by their private company for use by a related business entity to conduct their farming business would be disregarded and would therefore not attract a requirement to pay for the use; or "payments" made to hotel operator-shareholders that involve the provision of furniture and fittings in the hotel which are owned by their private company, would be disregarded.
  
  
• a "residence exemption" – any residence that is an integral part of the business real property owned by a private company but is lived in under a right-to-use or a licence as part of the carrying on the business is disregarded.
  
  Example: in addition to covering a farmer's use of a farmhouse owned by a private company, this carve-out would include, for example, a residence co-located with a hotel and owned by a private company, which is occupied by the shareholders of that private company.

Other company assets involving private use by shareholders and their associates

We welcome the exclusions but are concerned about the transitional aspects and compliance costs of the measures, such as:

• Implications for assets already held by private companies
  
  There has been no announced change to the proposed commencement date of 1 July 2009 or to provide an exclusion for assets held by a private company on the commencement date. In the absence of specific concessions for assets already held by a company the continued holding of such assets may be very costly from a tax perspective where private use is involved. Restructuring, such as the transfer of those assets to shareholders, may give rise to significant capital gains tax and stamp duty costs.
  
  
• Minor and infrequent use may still give rise to tax costs
  
  The announcement has not addressed the compliance costs associated with minor and infrequent private use of assets which may be subject to the new rules.
  
  Exposure Draft legislation amending Division 7A of the Income tax Assessment Act 1936 to give effect to the final form of the measure will be released shortly for public consultation.
  
  If you hold assets in a private company that involve private use, we recommend that you contact us to discuss suitable arrangements going forward.