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Edited version of private ruling
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Ruling
Subject: Lump sum payments for income stream
Question 1
Are the lump sum payments assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or are they subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997?
Answer
The lump sum payments are assessable as ordinary income under section 6-5 of the ITAA 1997.
Facts
X Co entered negotiations to purchase the company holding the franchisee agreements. X Co wrote to all franchisees outlining the proposal that franchisees surrender their right to ongoing commission in lieu of receiving payment from the X Co owned entity. Included in the letter was a deed to indicate acceptance of the proposal.
You were subsequently paid a lump sum amount as a payout in respect of a full and final settlement of all commissions otherwise payable under the current agreement.
Reasons for decision
Income according to ordinary concepts has been held by the courts to include income from the rendering of personal services, income from property and income from the carrying on of a business. The commissions form a significant part of the income you derive in carrying on a business. These commissions form part of your assessable income under subsection 6-5(2) of the ITAA 1997.
The issue of whether the commutation of an entitlement to periodic payments to a lump sum affects assessability was considered in Coward v. FC of T 99 ATC 2166; 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of the payment does not alter the character of the payment. See also FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 442; 10 ATD 82.
Under your agreement with X Co. you were paid periodic commissions based on the loans which you established. Under the settlement contract with the new owner you were paid a lump sum in satisfaction of future commissions to which you were entitled. Therefore this lump sum payment has the character of income because the commissions themselves had the character of income. Future income has simply been converted to present income - as stated in paragraph 65 of Taxation ruling TR 92/3:
'Thus, an amount received for the transfer of a right to an income stream severed from the property to which it relates is income according to ordinary concepts. Future income is simply converted into present income. This is the case even if the income stream is produced by a contractual right rather than by the relevant property.'
Therefore the lump sum payment made by X Co. is assessable as ordinary income under section 6-5 of the ITAA 1997.