Senate

Supplementary Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

General outline and financial impact

Amendment to Schedule 1 - Improving fairness and integrity in the tax system: distributions to entities connected with a private company

The amendment ensures that the use of certain company title flats or home units is not a payment for the purposes of Division 7A of the Income Tax Assessment Act 1936.

Date of effect: 1 July 2009. This amendment does not adversely affect taxpayers.

Proposal announced: This amendment has not previously been announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Chapter 1 - Amendment to Schedule 1 - Improving fairness and integrity in the tax system: distributions to entities connected with a private company

Amendment 1

1.1 The amendment ensures that the use of certain company title flats and home units is not a payment for the purposes of Division 7A of the Income Tax Assessment Act 1936. In a company title arrangement, a person purchases a share in a company that gives them the right to occupy a dwelling rather than purchasing the underlying dwelling. Company title arrangements have largely been replaced by strata title arrangements. However, some multi dwelling complexes, such as apartments and duplexes, are still owned in company title arrangements.

1.2 The amendment provides equitable treatment between individuals who own property through a strata title arrangement and individuals who are effectively forced to own a flat or home unit through a company title arrangement.

1.3 The amendment includes a number of requirements to ensure that the exemption is not manipulated. For example, the amendment only applies to flats and home units. The term 'flats or home units' incorporates a range of dwellings that are attached to land, such as duplexes and apartments. However, it does not include assets that are not attached to land, such as boats.

1.4 To qualify for the exemption, there must be more than one share in the company, each share or parcel of shares must provide the right to occupy a particular flat or home unit, and each flat or home unit in the complex must be attached to a share or parcel of shares in the company. This ensures that the exemption cannot be manipulated by, for example, purchasing a single holiday house or purchasing a single apartment in an existing apartment block.

1.5 The amendment also limits the types of assets and income that the company can have to ensure that the company is not accumulating profits and distributing those profits to shareholders tax free.

1.6 To be eligible for the exemption, the company must not own assets other than the land and buildings associated with the complex and related furnishings, plant, equipment and fittings. As such, a company can qualify for the exemption even if it owns a gym, pool or car park on an adjacent piece of land, if that gym, pool or car park is provided for the benefit of the occupants of the flats or home units.

1.7 The income of the company must be derived predominantly from managing and maintaining the land, buildings and facilities owned by the company, and interest and dividends relating to such income. This limitation ensures that the flat or home unit is not purchased using the profits of the company. However, it provides some flexibility for the company to earn income from the investment of funds provided by residents for the maintenance of common property in a manner similar to bodies corporate.

1.8 The exemption does not apply to a case where the interposed entity rules in Subdivision E of Division 7A apply.

Example 1.1

Jack owns a share in a private company, called Property Company, that owns a duplex.

Jack's shareholding gives him the right to occupy part of the duplex. Jack's use of the duplex will not ordinarily be a payment under Division 7A. However, if Jack is also a shareholder of a private company with accumulated profits, Profit Company, and that company makes a payment or loan to Property Company as part of an arrangement to make a payment to Jack, then the interposed entity rules will apply and Jack's use of the apartment will be a payment for the purposes of Division 7A.