Edited version of private ruling

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Ruling

Subject: Lease -back agreement

Question and answers:

Are you required to include the income received from the leaseback agreement of your residence with your spouse's employer in your assessable income?

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts

Your spouse is an employee.

As part of his salary package his employer is offering weekly rental assistance.

You and your spouse own your own home and are both listed on the title deed of the property.

Although your spouse is being offered rental assistance you wish to remain living in your home.

In order to continue living in your home, you are considering entering into an agreement with your spouse's employer whereby they will lease and lease back your main residence and pay you rent.

You state that under the agreement the payment of will be made out specifically to you, and will be made independently of your spouse's salary package.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources. Ordinary income includes salary or wages and rent.

The arrangement

On the face of the proposed arrangement, the company intends to enter into a lease agreement with you in order to grant the company a lease over the private residential property owned by you and your spouse. The lease will provide that the company will pay you an amount of rent at market rates in consideration of the grant of the leasehold interest. The company will then make the residential property available to you and your spouse as a housing benefit.

On the basis of the information provided, we infer that this arrangement is one which is incorporated as an element of an employment contract whereby an employee offers to provide their services to a company for reward in the form of an agreed sum. The entirety of this sum is the salary but only part of it is paid as such, the other part being purportedly paid as 'rent'. Nevertheless, the entire sum under either name is derived as a reward for the employee's services in their capacity as an employee and no part of it is derived as a reward for the use of the property. Further, if not for the fact that the employee was employed by the company, this housing benefit would not be available to them.

We infer that neither party intends to grant the employer a right of exclusive possession or a licence to occupy the premises the employee occupies as their private domestic residence. We cannot identify an intention to create any liability by employer to pay a sum to the employee as rent in addition to any prior liability the employer may have to pay money to the employee as a reward for services rendered by them in their capacity as an employee (salary or wages).

This view is consistent with the Commissioners view which is provided in Tax Determination TD 2004/26 Income tax: does an arrangement under which an employee and his employer lease and leaseback the employee's private residence and some of the employee's remuneration is replaced with income from property entitle the employee to a deduction for expenditure in relation to the residence under section 8-1 of the Income Tax Assessment Act 1997? Although in this determination the Commissioner deals with the subject of whether an employee is entitled to a deduction for any expenses that occur with regards to a simular arrangement. The Commissioner describes such an arrangement as being the replacement of an employee's remuneration with income from property.

In these circumstances, we do not infer that it was the intention of the company and the employee to create any legal rights and obligations other than the rights and obligations which were agreed under any contract of employment.

In your case

In your case, you will receive rental assistance payments in a lease and lease back arrangement with your spouse's employer in relation to your main residence.

The rental assistance payments that will be made to you are considered not to be payments made to you in the capacity of a landlord. This is highlighted by an inference that neither party intends to grant your spouse's employer a right of exclusive possession or a licence to occupy the premises that you and your spouse own and occupy as your private residence. This is not consistent with a conventional landlord/tenant lease agreement.

The rental assistance agreement that results in the payments being made are considered to be incorporated within your spouse's employment contract as a reward for services provided by your spouse, in their capacity as an employee. Therefore, the rental assistance payments are not assessable to you regardless of who the payments are made out to.

Accordingly, it is considered that the income that you will receive purportedly paid as rent, is not paid to you in the capacity of a landlord or for services provided and as such is not required to be included in your assessable income pursuant to section 6-5 of the ITAA 1997.

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