Edited version of private advice

Authorisation Number: 1052086501484

Date of advice: 13 February 2023

Ruling

Subject: Income - lump sum payment

Question

Will your share of the Payment be included in your assessable income?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

You, being Person A and Person B, jointly owned a property, the Property.

You entered into a lease agreement with Company A (the Lease) for a specified period which allowed them to undertake specified activities on a small portion of the Property (the Land) in exchange for you receiving rights to annual payments while maintaining your ownership in the Land.

You entered into a deed with Company X (the Deed) under which you agreed to assign your right to the annual payments received from Company A to Company X for a specified lump sum amount. The Deed related to all annual payments received by you from the date of the Deed and future payments received under the Lease and any future leases.

You received the lump sum amount in accordance with the Deed (the Payment).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

You received annual payments in relation to the Lease which were assessable income in nature. The conversion of the future annual payments into a lump sum payment does not alter the character of the lump sum amount, and it is also assessable income.

Detailed reasoning

Assessable income

Section 6-5 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.

Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon, or have an element of periodicity, recurrence or regularity.

Conversion of stream of income to a lump sum

Taxation Ruling TR 92/3 sets out the Commissioner's view as to the application of the decision of the Full Court of the High Court of Australia in FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer case).

The Ruling considers the taxation treatment of the conversion of a stream of income into a lump sum amount and with the following paragraphs stating:

17   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.

18   The above principle does not apply if:

a)    the right to income is not related to any underlying property, eg a right to an annuity; or

b)    the right is related to underlying property which the transferor has not previously owned.

The issue of whether the redemption or conversion of an entitlement to assessable periodic payments to a lump sum affects the assessability of the lump sum was considered in Taxation Determination TD 93/3. Paragraph 4 of TD 93/3 outlines that the effect of converting periodic payments to a lump sum amount had the effect of simply paying in advance the future periodic payments. Therefore, the commutation would result in the lump sum remaining assessable, retaining the character of the periodic payments.

Application to your situation

You entered into the Lease with Company A under which they were allowed to undertake specified activities on the specified area of the Property, being the Land, with you retaining your ownership in the Land.

Under the Lease you received annual payments which were assessable income for you as they had the characteristics of income and related to the rental of part of your property.

You entered into the Deed with Company X to assign your right to receive any lease payments from Company A, from the commencement of the Deed and any future payments, that become payable to you under the Lease and/or any future lease in relation to the Premises.

When you entered the Deed, you gave up your rights to any future payments in relation to the Lease. As outlined above, the conversion of your right to future payments under the Lease into the lump sum amount under the Deed did not change the nature of the lump sum amount. The lump sum amount merely replaced any future payments you would receive under the Lease, which would have been treated as income by you when they were received.

Therefore, the lump sum amount retains it character of ordinary income and is assessable to you under section 6-5 of the ITAA 1997.