| Disclaimer This edited version has been archived due to the length of time since original publication.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. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011762972259
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject : Proceeds received for rent-free periods upon acquisition of a commercial property
Question 1
Are the rent-free adjustments received on the date of settlement regarded as assessable income?
Answer: No.
Question 2
Are the rent-free adjustments received on the date of settlement a reduction in the purchase price of the commercial property?
Answer: Yes.
This ruling applies for the following period
Year ending 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
· private ruling application
· a contract of sale.
The entity purchased a commercial property.
The date of settlement was during the income year.
The entity acquired the property with the intention of continuing to carry out the business operations of the commercial property.
Under the term of the existing lease the tenants were granted rent free periods by the vendor prior to acquisition of the property by entity.
The rent-free periods for the tenants extended past the date of settlement.
Under the contract of sale the vendor has agreed to pay the purchaser on acquisition an amount of free rent for the period that extend past the date of settlement.
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 Income Tax Assessment Act 1997 (ITAA 1997).
However, if the 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).
Whether periodic payments made as a condition of the purchase of land and other assets are deductible has been considered by the courts.
In the case of Colonial Mutual Life Assurance Society Ltd v FCT (1953) 89 CLR 428; 5 AITR 597; 10 ATD 274 a life insurance company purchased land adjoining land that it already owned. There were a number of shops on the land which were leased to tenants. As part of the consideration for the transfer the purchaser agreed to pay the vendor 90% of the rents it received for a 50 year period.
The High Court held at 5 AITR 609 that the expenditure was not deductible as it was an outgoing of capital. Fullagar J concluded that the payments formed part of the purchase price of a capital asset for the following reasons at 5 AITR 609:
It is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature.
In the entity's case, the entity purchased a commercial property from the vendor under a contact of sale. The wording of the contract indicates the payment made by the vendor for the rent- free periods was a condition of sale at the date of settlement and was not part of any rental or lease arrangement with the existing tenants.
Therefore, the payment of the rent-free period is not assessable income under section 6-5 of the ITAA 1997 as the payment is a reduction of the capital purchase price of the property.