Edited version of your written advice

Authorisation Number: 1012797347489

Ruling

Subject: Lump sum payment

Question 1

Can an amount received as a lump sum payment of rent in arrears, be spread over the years to which it relates?

Answer

No

Question 2

Should the amount received as a lump sum payment of rent in arrears, be included in your assessable income in the financial year in which it was received?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commenced on:

1 July 200X

Relevant facts and circumstances

In 200X, an individual (the tenant) commenced renting a property from you, located at the rear of your property.

The tenant paid you an amount upfront in rent which, calculated per week, paid the rent up until the end of mm/yyyy.

The tenant was experiencing substantial financial difficulties and had not been able to work, as well as being involved in legal proceedings at around this time, which resulted in the tenant suffering from severe depression.

The tenant had no money to pay the now due rent and you allowed the tenant to continue living in the property.

Receiving no rent from the tenant caused substantial friction between the two of you, resulting in regular heated arguments.

The tenant vacated the flat in 20XX.

You received an amount by way of cheque from the tenant in 20XX as payment in arrears for the rent owed to you from 20YY until the time the premises was vacated in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Section 159ZR

Reasons for decision

Assessability of rental income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a resident taxpayer is assessable on ordinary income derived from all sources, whether in or out of Australia, during the income year.

Rental income is considered 'ordinary income' and is assessable under section 6-5 of the ITAA 1997.

Subsection 6-5(4) of the ITAA 1997 states that in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it applied or dealt with in any way on your behalf or as you direct.

Lump sum payments in arrears

Individual taxpayers who receive certain income in a lump sum payment containing an amount that accrued in earlier income years may be entitled to a rebate of tax.

Section 195ZR of the Income Tax Assessment Act 1936 (ITAA 1396) states that to be eligible for this rebate, certain conditions must be met, the first of which is that the income must be eligible income.

Eligible income means:

(a) Salary or wages to the extent to which they accrued during a period ending more than 12 months before the date on which they were paid,

(b) Salary or wages paid to a person after reinstatement to duty following a period of suspension,

(c) Superannuation income streams or annuities,

(d) Income by way of compensation or sickness or accident pay,

(e) A Commonwealth education or training payment, such as Austudy, and

(f) Assessable pensions, benefits and allowances under the Social Security Act or similar.

Application in your circumstances

In your case, the payment you received for arrears of rent owed to you is considered 'ordinary income'. Accordingly, the whole amount must be declared in your income tax return for the financial year in which you received it.

Further, whilst we acknowledge the lump sum payment you received was in consideration of rental income accruing over a substantial period of time, the payment does not meet the definition of eligible income under section 195ZR of the ITAA 1936 for the purposes of claiming a lump sum in arrears rebate, therefore; this rebate is not available to you.