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Edited version of your written advice
Authorisation Number: 1012828340785
Date of advice: 23 June 2015
Ruling
Subject: Assessable income
Question
Will the payments received under the proposed arrangement be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
You own an interest in several investment properties. You intend to sell these properties to the tenants under vendor finance agreements.
The tenants are unable to be approved for mortgages in their own names.
You propose to enter into a legal agreement with the tenants for the sale of the properties at their current value.
You will provide the finance in your own name with your bank and the properties will remain in your name until such time as the tenants can provide finance.
The purchasers will have x years to pay out the loan or transfer the loans into their own names.
If the purchasers are unable to pay out the loans you will consider extending the agreement by a further x years.
The purchasers will not continue to pay rent.
Upon entering into the agreement, the purchasers will be responsible for all household expenses.
The purchasers will be responsible for weekly repayments of the loan.
You will not charge the purchasers any additional fees.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Reasons for decision
It is generally accepted that rent is ordinary income and included in assessable income under section 6-5 of the ITAA 1997. However, if weekly instalments represent instalments of the sale price they will be capital receipts and not ordinary income (Foley v. Fletcher (1858) 157 ER 678).
In determining whether or not a payment is rent, it is the reality or substance of the matter, rather than the label given by the parties to the transaction which is decisive (Ex parte Lathouras; Re Vendardos [1964-1965] NSWR 254).
ATO ID 2003/968 deals with the sale of residential property under an instalment contract. The facts in this case were as follows:
The taxpayer owned a residential property.
The taxpayer entered into an agreement for the sale of the property. The agreement provided that:
• The purchaser pays a deposit at the time of entering the contract.
• Settlement of the contract does not take place until 85 months later at which time title to the property is transferred.
• The purchaser has a right to occupy the property prior to settlement.
• The purchaser pays a weekly amount (specified in the contract as 'rent') for the right to occupy the property.
• From the time of entering into the contract the purchaser agrees to pay council rates and taxes and insurance on the property.
• The balance of the purchase price to be paid on settlement of the contract is reduced by the weekly instalments.
• If the purchaser fails to complete the purchase, the deposit and weekly instalments are forfeited.
In ATO ID 2003/968 the Commissioner considered that the true nature of the agreement is an instalment contract for the sale of the property. The purchase price is paid in instalments with transfer taking place once the full purchase price is paid.
In this case you intend to enter into an agreement to sell your rental properties to the current tenants. The purchasers will make weekly payments and take responsibility for all household expenses. We consider your situation is similar to that outlined in ATO ID 2003/968. The weekly payments represent instalments of the sale price and are capital receipts. Therefore, the weekly payments are not assessable as ordinary income under section 6-5 of the ITAA 1997.
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