Edited version of private advice

Authorisation Number: 1051628363729

Date of advice: 7 February 2020

Ruling

Subject: Property settlement extension fee

Question 1

Is the property settlement extension fee you received ordinary income?

Answer

No.

Question 2

Did the property settlement extension fee you received result in a capital gain?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You own an investment property which was purchased before 1985.

You exchanged contracts for the sale of the property approximately XX months ago.

A couple of months after the exchange of contracts the purchaser paid you a settlement extension fee of $xx,xxx to extend the contract settlement date.

The property did not sell, and is still on the market.

You retained the $xx,xxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 116-20

Reasons for decision

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

You received a payment that is not income from rendering personal services, income from property or income from carrying on a business. The payment is a one-off payment and does not have an element of recurrence or regularity. Accordingly, the lump sum payment is not ordinary income.

Capital gain

Assessable income also includes a capital gain.

A capital gains tax (CGT) event D1 happens if an entity creates a contractual right or other legal or equitable right in another entity: section 104-35(1) of the ITAA 1997.

You make a capital gain if the capital proceeds from creating the right are more than the incidental costs you incurred that relate to the event.

In your case, when you extended the contract settlement you created a contractual right in favour of the purchaser being the right to settle the contract beyond the previous contractual settlement date.

Subsection 104-35(5) of the ITAA 1997 sets out certain the exceptions when CGT event D1 does not happen. It states that CGT event D1 does not happen if:

(a)  you created the right by borrowing money or obtaining credit from another entity; or

(b)  the right requires you to do something that is another CGT event that happens to you; or

(c)  a company issue or allots equity interests or non-equity shares in the company; or

(d)  the trustee of a unit trust issues units in the trust; or

(e)  a company grants an option to acquire equity interests, non-equity shares or debentures in the company; or

(f)   the trustee of a unit trust grants an option to acquire units or debentures in the trust

None of these exceptions apply to you in relation to the CGT event. Therefore, CGT event D1 happened to you when you created the contractual right for the extended settlement date in favour of the purchaser.

Capital proceeds from a CGT event, under paragraph 116-20(1)(a) of the ITAA 1997 is the money you received or are entitled to receive in respect of the event happening. In your case, you received $xx,xxx for creating the contractual right in favour of the purchaser, which as stated above, is CGT event D1.

In working out your capital gain from the D1 event, you may have incidental costs to offset against the capital proceeds, for instance legal fees in order to formalise the contract extension agreement.

Note: Your property settlement extension fee is not considered analogous to a forfeited deposit as the fee was never intended to be a part payment of the sale price. Therefore Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits does not apply to you.