Edited version of private ruling

Authorisation Number: 1011488950951

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Ruling

Subject: Treatment of payment for the termination of a franchise contract.

Question 1

Is the payment for the termination of the franchise agreement assessable as ordinary income?

Answer

Yes.

Question 2

Is the payment for the termination of the franchise agreement assessable in the year of receipt?

Answer

Yes.

This ruling applies for the following period

1 July 2008 to 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

During the financial year 2008-09 you received a once off payment to allow the sale/transfer of your business from one franchise to another franchise.

The payout was covered by a deed of settlement and release form that stated that the payout amount was in full and final settlement of all commissions otherwise payable by the lending institution under the franchise agreement.

During the life of the original agreement the commissions were paid monthly.

Reasons for decision

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that, your assessable income includes income according to ordinary concepts, which is called ordinary income. Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

There are four main characteristics of ordinary income that have evolved from case law:

- it has elements of periodicity, recurrence and regularity

- it is relied upon

- it is expected, and

- it is earned.

It is not essential for all of these characteristics to exist for a particular type of receipt to be considered income according to ordinary concepts.

In your case when you operated the franchise the commissions from the lending institution were expected and relied upon as your entitlement to the payments arises under the loan contract. Your payments from the lending institution also had an element of periodicity, recurrence and regularity as they are paid monthly.

Accordingly, the monthly payments received by you from the lending institution were regarded as income under ordinary concepts and were assessable under section 6-5 of the ITAA 1997.

The payment to you by the lending institution in accordance with the deed of settlement and release is in full and final settlement of all commissions otherwise payable under the franchise agreement for loans settled by the payment date.

As commissions are regarded as income, the lump sum payment you received is also of an income nature.

Therefore, the payment received by you from the lending institution is assessable income under section 6-5 of the ITAA 1997 and taxable at normal rates.

Income year to report ordinary income

Paragraph 41 of Taxation ruling TR 98/1 Income tax: determination of income; receipts versus earnings, states, generally, for non-trading income, it is when amounts are received, they have come home to the taxpayer in an immediately realizable form.

In your circumstances all the commissions that normally would be paid monthly were paid in one lump sum amount. You signed the deed of settlement and release document in the 2008-09 income year stating the payment date was to be in the 2008-09 income year. Under the receipts method of accounting income is derived when it is received, either actually or constructively.

Therefore as the payout amount was received in the 2008-09 income year, you are required to account for the amount received in the 2008-09 income year.