By Jim Main -
Snapshot
- 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 to see you. He has 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 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.
Fred also took the opportunity to buy another farm in the company name with a bit of help from his friendly bank manager.
As you found out later, things did not 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 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 is not always fun
‘Well’, said Tony, ‘I have to explain to you the implications of section 109CA of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’).
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’.
