Edited version of your private ruling

Authorisation Number: 1012515202341

Ruling

Subject: Lump sum payment

Question

Does the lump sum payment you received as a result of signing an Agreement form part of your assessable income?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You operate a business.

You entered into the Agreement with Company X.

Under the Agreement you will supply services out of company X's buildings.

You received a lump sum payment from Company X in consideration for signing the Agreement ('the consideration'). If you terminate the Agreement within a specified time you are required to refund a proportion of the lump sum payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

The consideration you received for signing the Agreement is included in your assessable income as it is income earned from conducting your business activities. The fact that the amount may be repayable, in part, if you terminate the contract within a specified time does not affect when it is assessable.

Detailed reasoning

Assessable income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

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.

In Esso Australia Resources Ltd v FC of T 98 ATC 4768; (1998) 39 ATR 394 (Esso) the taxpayer carried on the business of exploring for, producing and selling oil and gas. The taxpayer entered into a joint venture agreement whereby H Ltd was required to pay a portion of the costs of drilling. Under the agreement H Ltd elected to make payments directly to the taxpayer. The court held that the payment by H Ltd was assessable income as it was either received within the ordinary course of the taxpayer's business or resulted from some profit-making purpose of the taxpayer. Further, the rights of the taxpayer under the joint venture agreement were not lost or altered by the payment and the taxpayer did not deprive itself permanently of any capital asset when it received the payment.

Your situation is similar to that in Esso as you have received the consideration from Company X as a result of entering into the Agreement with them. The Agreement forms part of your business activities.

Therefore, the consideration from Company X forms part of your assessable income as it is a proceed from carrying on your business.

Timing of assessable income

Income is assessable when it is derived. The question of when income is derived depends on the nature of the income and, in some cases, on the nature of the income-earning activities of the taxpayer who derived the income.

Generally, income is derived upon its receipt or when the right to receive it arises as a debt due and owing.

In your situation, a debt became due and payable to you by Company X when you signed the Agreement. As this occurred during the 2012-13 financial year, the lump sum payment will be included in your assessable income for that year.

The fact that you will be required to repay part of the consideration if you terminate the agreement in the future does not affect when the income is included in your assessable income.

The consideration from Company X forms part of your assessable income for the year ended 30 June 2013.