ATO Interpretative Decision

ATO ID 2004/406

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the proceeds the taxpayer receives to arrange for the purchase of properties by investors and their sale under instalment contracts, included in their assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year in which the proceeds are received?

Decision

Yes. The proceeds are ordinary income and are included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 in the year in which they are received.

Facts

The taxpayer is a property manager and has entered into joint venture agreements with investors. The taxpayer arranges for investors to purchase residential properties, with the intention of selling them to third party purchasers under instalment sales contracts with vendor finance.

Under the joint venture agreement, the taxpayer supervises the performance of the instalment sales contract.

At regular intervals, the taxpayer distributes equally, between the investor and itself, the amount remaining from the instalments after deducting the joint venture expenses, including the investor's loan repayments.

The title in the property is held by the investor.

The joint venture agreement states the agreement does not constitute a partnership.

The instalment sales contract between the third party purchaser and the investor has the following features:

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the sale price represents a profit over the investor's purchase price after purchaser expenses

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the payment of a deposit by the third party purchaser

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vendor finance is provided to the third party purchaser with interest charged at a premium above the rate of interest paid by the investor on their mortgage on the property

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payment of the balance of the sale price, plus interest, is by instalments over a substantial period, such as 25 years

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the third party purchaser is licensed to occupy the property during the term of the instalment contract

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the contract states that this occupation is not by way of lease

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the third party purchaser is required to pay the rates, taxes and insurance premiums on the property and is responsible for the repair and maintenance of the property

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the investor retains title to the property until the final instalment is paid and the contract is completed, at which time the title is transferred to the third party purchaser

•

if the third party purchaser defaults on the contract, the deposit and instalments paid are forfeited to the investor.

Reasons for Decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Subsection 6-5(1) of the ITAA 1997 states that ordinary income is income according to ordinary concepts. Characteristics of what is ordinary income have evolved from case law and include receipts that:

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are earned

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are expected

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are relied upon; and

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have an element of periodicity, recurrence or regularity.

In Taxation Ruling TR 98/1 the Commissioner provides a guide to determining when income is considered to have been derived. At paragraph 17 TR 98/1 states that:

When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income.

In the case The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Ltd (1938) 63 CLR 108 at 155; 5 ATD 98 at 132; (1938) 1 AITR 416 at 442 Dixon J stated:

Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form.

Paragraph 89 of Taxation Ruling TR 97/9 considers when income is derived from the sale of real property in reference to the case Gasparin v. Federal Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1994) 28 ATR 130:

...a vendor in a real property transaction will not have performed all that is needed to become entitled to a payment prior to settlement. At settlement, transfers are effected which put the purchaser in a position to become registered as owner. As such, the vendor does not earn the income from the sale until settlement.

The receipt by the taxpayer of 50% of the net proceeds of the joint venture has the characteristics of ordinary income for the purposes of subsection 6-5(1) of the ITAA 1997 as the amounts are expected, relied upon and have an element of periodicity, recurrence or regularity.

The joint venture agreement provides that the title in the property is taken by the investor - not the taxpayer. Therefore, the taxpayer's 50% of the net proceeds is not reliant on settlement of the contract for sale of the property.

Accordingly the proceeds of the joint venture are included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 in the year in which they are received.

Amendment History

Year of income:  Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 6-5

Case References:
The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Ltd
   (1938) 63 CLR 108
   (1938) 5 ATD 98
   (1938) 1 AITR 416

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/1
Taxation Ruling TR 97/9

Related ATO Interpretative Decisions
ATO ID 2004/25
ATO ID 2004/26
ATO ID 2004/27
ATO ID 2004/28
ATO ID 2004/29
ATO ID 2004/407

Keywords
Ownership, interests, control & rights
Real estate ownership & interests
Real estate as trading stock
Sale by instalments
Finance

Siebel/TDMS Reference Number:  3227611; 1-5RRL6HQ, 1-BLSLMVO

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  14 May 2004
Date reviewed:  7 June 2017

ISSN: 1445-2782