Draft Taxation Determination

TD 93/D10 (Withdrawn)

Income tax: capital gains: does a payment made by the vendor under a rental guarantee agreement form part of the vendor's cost base of the income producing property that was sold?

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  This document has been Withdrawn.

FOI status:

draft only - for comment

Preamble

1. No, the payment doesn't form part of the cost base of the rental property under section 160ZH of the Income Tax Assessment Act 1936 (ITAA).

2. A payment under a 'rental guarantee agreement' is a payment which the vendor is obligated to make under a contract for sale covenanting a certain 'guaranteed rent' from the property. If there is a shortfall in actual rental receipts from the property, the vendor is required to pay the purchaser (now the owner of the property) the difference.

3. The 'rental guarantee agreement' is a separate asset from the property that was sold, pursuant to section 160A. The rights under the 'rental guarantee agreement' are a chose in action in the hands of the purchaser of the property, which may be enforceable on the occurrence of certain events stipulated in the contract.

Example

A agrees to sell B a commercial property for $1,000,000. As part of the contract for sale, A covenants that the minimum guaranteed rental from the property will be $100,000 per annum for a period of two years from the sale. At the end of the first year of B's ownership, B has only been able to earn $80,000 in rent from the property, and obtains payment of the shortfall of $20,000 from A. The payment does not form part of the cost base of the property that A sold to B.

Commissioner of Taxation
21 January 1993

References

Subject References:
capital gains
cost base
rental guarantee

Legislative References:
ITAA 160ZH(1)(c)
160A