Edited version of private advice

Authorisation Number: 1052307168725

Date of advice: 19 September 2024

Ruling

Subject: Ordinary income

Question

Is the tenant contribution received assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 202X to 30 June 202XX

The scheme commenced on:

1 July 202XX

Relevant facts and circumstances

The trustee is the owner of the Premises.

The Trustee is carrying on a business of managing the Premises they own.

The Trustee manages the operations of the Premises and as the landlord they enter into leases directly with tenants and collect rent directly to their bank account.

The Trustee maintains common areas of the Premises and pays directly for all maintenance costs including cleaning, security, handyman, general repairs and maintenance.

The Trustee plans and executes upgrades to the Premises as and when needed.

The Trustee attends to the marketing of the Premises and to reduce administration, the labour required for operating the Premises is employed by a related entity, which also provides the same services to other related entities for which all costs are shared between the related entities via management fees.

Negotiations began with the Tenant on the lease variation and works to be carried out by the Tenant and the Trustee.

The Tenant agreed to undertake a refurbishment of their tenancy and pay the Trustee a contribution towards the cost of rehabilitation of the car park.

A deed of works and variation of lease agreement was entered into (the Deed), which included a payment by the Tenant to the Trustee.

The Trustee completed the works and the Tenant paid the contribution to the Trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997section 6-5

Income Tax Assessment Act 1997subsection 6-5(1)

Reasons for decision

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that an entity's assessable income includes income according to ordinary concepts, called ordinary income.

Therefore, for the tenant contribution to be assessable to the Trustee under subsection 6-5(1), the tenant contribution must be considered to be ordinary income.

Furthermore, the ordinary income must be derived directly or indirectly from all sources during the income year by an Australian resident.

There is no definition of 'ordinary income' in the income tax legislation.

However, a substantial body of case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts.

Whether a receipt is to be treated as income or not requires a consideration of the ordinary characteristics and quality of receipts treated as income.

In FC of T v Myer Emporium 87 ATC 4363 (Myer), the Full High Court considered that the key features of income include periodicity, recurrence and regularity. Although, these features are not necessarily decisive.[1] Indeed a single or isolated transaction may still be considered to have the character of income.[2]

In Myer, the fact that a profit or gain was derived in the course of the taxpayer's business was said to be of 'telling significance'.[3]

The Commissioner is of the view that in referring to profits or gains made in the ordinary course of business, the court in Myer meant either:

a.            a profit or gain arising from a transaction which in itself is a part of the taxpayer's business...provided that the gross receipt of that profit or gain lacked the character of income; or

b.            a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity.[4]

In FC of T v Cooling (Cooling), the Full Federal Court held that lease incentive payments made by AMP to Bengil (the taxpayer's service company) were income according to ordinary concepts because they were an ordinary part of the firm's business activity, albeit that they were an extraordinary or unusual part.[5]

Taxation Ruling TR 2005/6: lease surrender receipts and payments provides the Commissioners view on the circumstances where a lease surrender receipt is assessable income under section 6-5 of the ITAA 1997.

The following Example at paragraph 84 in TR 2005/6 sets out the Commissioners view on payments when a lessor is carrying on a business that involves the entering and surrendering of leases as a normal incident of its business operations:

A shopping centre proprietor owns a large shopping centre complex in which there are 150 shops. The negotiation of leases is part of the normal ebb and flow of such a business. In the ordinary course of business affairs leases will expire and come up for renewal, tenants will want to sell their businesses and request permission to assign leases and other tenants may fail to make a satisfactory profit and want to break their lease. On other occasions it may be the proprietor who wants to terminate particular leases in order to attract high profile tenants or to get rid of poorly performing businesses. In these circumstances the principal asset of the proprietor from a practical and commercial point of view is the shopping centre. The building forms part of the business structure whereas the leases are part of the process by which the proprietor operates to obtain regular rental income. In this case recurring outgoings on lease surrender payments incurred by the proprietor would form part of the normal ebb and flow of the business so that the outgoings would be on revenue rather than capital account.

A key part of the Trustee's day-to-day operations in carrying on a business is to initiate, vary or surrender lease agreements directly with the tenants and collect rent.

It is also the Trustee's responsibility to maintain the common areas of the Premises and pay directly for all maintenance costs including cleaning, security, handyman, general repairs and maintenance. This includes planning and executing upgrades to the Premises as and when needed and in this situation it involved the upgrade to the common area of the car park.

In this case the lease with the Tenant was due to expire. The scope of works were determined by both the Landlord and the Trustee during the negotiation period prior to entering into the Deed.

It was agreed that the Trustee would provide the Tenant a further lease option and the Tenant would contribute an amount towards the costs of the upgrade and undertake a substantive renewal/refurbishment of the Premises.

It was agreed that the Trustee would undertake the works given the Tenant would not be in a position to undertake such works on a Trustee asset.

In the Deed, a variation clause was inserted into the new lease agreement which states that the Tenant will contribute the Tenant's Contribution to the costs incurred by the Landlord.

It can be determined from the facts that the Trustee's business activities involve entering, negotiating and surrendering leases as a normal incident of their business operations. The Trustee manages the ongoing ebb and flow of leases and payments as part of their business activities and have negotiated a lease renewal with the Tenants as part of their property management and normal lease negotiation process.

The collection of rental income forms part of the Trustee's ordinary revenue that's derived from the management of ongoing leases including the entering, variation and surrendering of leases and property management with various tenants across the Premises.

Based on the decisions in Myer and Cooling and the guidance in TR 2005/6, the Commissioner can draw similarities to the facts in this case to conclude that the payment was a receipt obtained as a part of the Trustee's ordinary business activities and operations.

Therefore, the payment from the Tenant was received in the ordinary course of the business operations of the Trustee and is assessable income under section 6-5 of the ITAA 1997.

[1] FC of T v Dixon (1952) 86 CLR 540, 567 - 568.

[2] FC of T v Myer Emporium 87 ATC 4363; Californian Copper Syndicate v Harris (1904) 5 Tax Cas 159, 166.

[3] FC of T v Myer Emporium 87 ATC 4363, 4370.

[4] Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income, paragraph 32.

[5] Cooling v FC of T 90 ATC 4472, 4483-4484