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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012766342754

Ruling

Subject: Assessable income

Question 1

Will the payment from the real estate agent be assessable as ordinary income?

Answer

Yes

Question 2

Will the management fee paid to the real estate agent be deductible?

Answer

Yes

Question 3

Will the other expenses incurred in relation to the property after the X be deductible?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The rental agreement for your investment property was meant to expire on the X.

Due to a mistake by the real estate agent the tenants vacated on the X.

The real estate agent has paid you an amount to compensate you for the loss of income between the above two dates.

You were still charged a management fee.

You began to move furniture into the property gradually after the X intending to move into the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary income that have evolved from case law include receipts that:

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

In your situation you have been paid an amount to compensate you for the loss of income due to your agent's error. The compensation takes the character of what it replaces and is consequently assessable as ordinary income.

Deductions

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Generally, expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction.

We consider that the property cannot be considered to be available for rent after the tenant has moved out and you have taken possession of the keys. Additionally as demonstrated by moving of furniture you had formed an intention to reside in the property. Consequently the expenses incurred in relation to the property are not deductible after dd/mm/yyyy. The management fee charged by the agent will be deductible as it specifically relates to the payment of assessable income from the agent.

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