• Acquiring assets through a company may attract various tax implications.
  • Always advise the client to talk to an accountant before buying property in the name of a company.

Your farmer client Fred comes see you. He’s had a couple of very successful years and wants to buy a beach house for the family. He trades in a company –  Blue Sky Pty Ltd  – and has a lot of surplus cash following a bumper harvest. “What a better thing could I do” says Fred “than to buy a beach house for all the family.”

Sure enough, the following summer the beach house has a lot of use by Fred’s children and grandchildren.

Not only this but Fred also took the opportunity to buy another farm in the company with a bit of help from his friendly bank manager.

As you found out later, things didn’t turn out so well the following autumn when Fred had his regular tax planning meeting with his accountant Tony.

Tony asked what Fred had been up to and was initially pleasantly surprised to hear it had been such a good year that the beach house had been purchased.

Tony’s smile turned into a frown though when Fred told him the beach house had been purchased in the name of Blue Sky Pty Ltd. “Whatever for?” asked Tony. “Because it had lots of surplus cash,” said Fred.

“Do you ever lease the beach house to anyone else?”  asked Tony. “For goodness sakes – why would we – we don’t need the rent” Fred replied.

First sting – the beach isn’t always fun

“Well”, said Tony, “I have to explain to you the implications of section 109CA of the Income Tax Assessment Act 1936 (“ITAA”).

Tony explains that under section 109CA whichever family member uses the beach house for a holiday will be liable to income tax on the market value of the rent.

“How could that be?” Fred asks. Tony says “it’s been the law since 2009. You or your lawyer should have spoken to me first.”

Second sting – companies and double tax

“Well”, said Fred, I do have something else to tell you. Since I last saw you, I bought another farm in the name of Blue Sky Pty Ltd. Are you going to tell me that’s a big problem too?

Tony replied that the problem is that – in the long term under current law – when you sell the farm and pay the capital gain to the shareholders you pay twice the amount of tax on the capital gain because there is no general 50% discount.

It’s a complex chain of events but effectively the whole capital gain is taxed as a dividend in the hands of the shareholder. If Fred bought in his own name, the full 50% discount would apply.

Third sting – being generous can hurt too

“But I can’t see the family ever selling”  said Fred, “I know none of my kids want to come home to the farm, but my nephew Alec does want to come back, so when I retire, I plan to lease the farm to him at a significant discount. I want a lease because I want him to be secure. But I do not want him to have to pay full market rent because he may not be able to afford it”.

At this stage Fred wondered why Tony was starting to groan.

The problem – Tony said slowly – is that any discount you give Alec off market value rent will be taxed in his hands under section 109C of ITAA 1936.

But why all this pain?

“What the …  is going on here” exclaimed Fred,  “it feels like I’m being persecuted for being a successful farmer and doing the sort of thing successful farmers do”.

“Well”, Tony said, “you have to imagine this part of the tax legislation –  Division 7A of ITAA 1936 –  to be like a barbed wire fence around the company. There are a couple of gateways but unless you go through one the barbed wire will badly rip your pants.”

The pain goes on

“So what should I do?” asked Fred. “Well”, said Tony “initially you have to pay the tax. We could look at maybe  transferring the beach house to you, but it wouldn’t be cheap. You haven’t owned it for long so maybe no capital gain but there would be stamp duty and the market value of the beach house would be treated as an assessable dividend under Division 7A.”

“Please stop” says Fred, gloomily.

Takeaway points

  • Always talk to the accountant before buying a property in a company
  • Always talk to the accountant before buying a property in a company
  • Always talk to the accountant before buying a property in a company