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Edited version of private ruling
Authorisation Number: 1011475140765
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Ruling
Subject: Nature of amount received for settlement
Question 1
Is the money that you received as a result of the Deed of Settlement (The Deed) assessable income?
Answer
Yes.
This ruling applies for the following period:
1 July 2008 - 30 June 2009
The scheme commences on:
1 July 2006
Relevant facts and circumstances
You are property developers who entered into a contract for the sale of land.
The contract for the sale of land was entered into in respect of the purchase by the buyer of land from you. This contract was entered into as a part of your property development activities.
The buyer did not want to proceed to settlement of the purchase of the Land pursuant to the contract and communicated her intention not to proceed with the said purchase to you.
You subsequently drew up a deed of settlement (Deed) between you and the buyer. The Deed was entered into in the year ending 30 June 2009. You made claims for damages and losses against the buyer arising from and as a consequence of the buyer's failure to complete the contract and proceed to settlement on her land purchase.
The Deed was not the subject of a court order. The amount of the settlement did not include the deposit. You and the buyer have agreed to settle the claims on the terms of this deed.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Reasons for decision
Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) your assessable income includes income according to ordinary concepts. This is known as ordinary income.
An amount received in connection with the cancellation or variation of a contract or agreement made in the course of carrying on a business is usually of an income nature if the amount which it replaces would have been income.
In your case you received compensation for the cancellation of a contract in relation to a property that you were selling as a part of your activities as a property developer. As a property developer, any income that you would have received if the contract was completed would have been ordinary income. The amount that you received for the cancellation of this contract is therefore assessable as ordinary income.
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