Private ruling: Tax treatment - adjustments to purchase price
Date of advice: 6 May 2026
Published: 20 July 2026
Ruling period: Year ended XX Month
Date scheme commenced: XX Month 20XX

Ruling: Q1: Is the Discounted Incentive Amount included in the assessable income of the Trust under subsection 6-5(1) of the Income Tax Assessment Act 1997 ? | A1: Yes. | Q2: Is the Discounted Incentive Amount included in the assessable income of the Trust under subsection 6-5(2) of the Income Tax Assessment Act 1997 in the 20XX income year? | A2: Yes. | Q3: Does the Trust need to apportion the Purchase Price to each CGT asset acquired under the Contract on a reasonable basis in accordance with section 112-30 of the Income Tax Assessment Act 1997 ? | A3: Yes. | Q4: Does the first element cost base and reduced cost base of the Leases include the value of the for Outstanding Lease Incentives in accordance with the assumption of liability rule in section 112-35 of the Income Tax Assessment Act 1997 ? | A4: Yes.

Relevant facts and circumstances: Background The Trust entered into a contract of Sale ('the Contract') with the Vendor to purchase the property. The Contract was executed on XX Month 20XX. The Contract settlement date was XX Month 20XX ('Settlement Date'). The purchase price specified in the details is $X ('Purchase Price'). The 'property', as specified in the Contract, includes the Land, the Building and the Plant and Equipment ('the Commercial Property'). The property was subject to leases with various tenants ('the Leases'). Under the Contract, the Trust must pay the Vendor the Purchase Price less the deposit by the Purchaser (taking into account any adjustments or allowances under the Contract) on the Settlement Date ('Residue'). At Settlement, the Trust paid the Residue to the Vendor. Leases The Trust took title subject to the Leases. The Vendor assigned the Leases to the Trust. Incentives Prior to entering into the Contract, some tenants had agreed to receive incentives under the Leases in the form of rent-free concessions ('Outstanding Incentives'). The Vendor is required under the contract to pay the purchaser, by way of adjustment to Residue payable on settlement, the discounted value of Outstanding Incentives ('Discounted Incentive Amount'). The Trust is liable for outstanding obligations under each Lease, including the provision of any incentives, from the Settlement Date. The Outstanding Incentives relate solely to rent-free concessions. Not all of the Leases have Outstanding Incentives. The aggregate value of Outstanding Incentives owed to the tenants at settlement is $X. Adjustment to Purchase Price At settlement, the residue was adjusted by $X to reflect the Discounted Incentive Amount payable by the Vendor to the Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6- 5 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 Division 110 | Income Tax Assessment Act 1997 Division 112 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Yes, the Discounted Incentive Amount is income according to ordinary concepts as it was received in substitution of rental income. | Detailed Reasoning - Detailed reasoning: Section 6-5 provides the following: 6-5 Income according to ordinary concepts ( ordinary income ) (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income . Under subsection 6-5(1), ordinary income is included in assessable income. Neither the term 'income,' nor 'ordinary concepts' of income, are defined in the Act. It is well established that the meaning of 'income' must be considered by reference to the ordinary usage of the word ( Scott v Federal Commissioner of Taxation [1966] HCA 48). The Macquarie Dictionary defines income as follows: 1. the returns that come in periodically, especially annually, from one's work, property, business, etc.; revenue; receipts. While the courts have embraced the notion of periodicity, regularity and recurrence, they have distinguished between receipts which are in the nature of income and those which are in the nature of capital. In GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25 the High Court said the following: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. While there is no complete set of rules, the courts have developed principles for determining what is ordinary income. Therefore, whether an amount is ordinary income must be determined by applying the court-developed principles to the facts of a particular case. Some principles are of a general nature, while others are more specific to particular types of receipts. | Detailed Reasoning - General Principles: It is a long-held general principle that the character of the receipt is defined in the hands of the recipient and that in determining its character, consideration must be given to the 'totality of the circumstances' ( Federal Commissioner of Taxation v Anstis [2010] HCA 40). A general principle of 'substitution' also exists, meaning that a payment simply constituting compensation for loss of profits, is a payment to 'fill a hole in profits', and is generally taxable in the recipient's hands ( Commissioner of Taxation (NSW) v Meeks [1915] HSCA 34 ( Meeks ). The principle of substitution was applied in Heavy Minerals Pty Limited v Federal Commissioner of Taxation [1966] HCA 60 ( Heavy Minerals ). In that case, the taxpayer was a supplier of oxide minerals who had agreed to supply customers overseas. After the collapse of the overseas market, the customers cancelled their supply contracts, and in consideration, paid the taxpayer monetary compensation. The High Court held that the monetary compensation received was income as it was compensation for the loss of profits. In Allied Mills Industries Pty Ltd v Commissioner of Taxation (1989) 20 FCR 288, Bowen CJ, Lockhart and Foster JJ applying the decisions in Meeks and Heavy Minerals described the principle in their joint judgement at 309: If a payment simply constitutes compensation for loss of profits under an agreement made in the course of the taxpayer's business which it would otherwise expect to have made, it is a payment "to fill a hole in profits" and would generally be taxable in the taxpayer's hands: Commissioner of Taxation (NSW) v Meeks (1915) 19 CLR 568; Heavy Minerals Pty Ltd v Commissioner of Taxation (Cth) (1966) 115 CLR 512. Accordingly, where a business receives an amount in substitution of profits, that amount will also take on the character of income. | Detailed Reasoning - Application to the Circumstances: The Trust entered into the Contract to acquire the Commercial Property subject to existing Leases. Prior to the sale, the Vendor had agreed to provide certain lease incentives which related solely to rent-free concessions. When The Trust acquired the Leases, it assumed the liability to provide the rent-free concessions to the tenants. Under the contract, the Vendor must pay the Trust the Discounted Incentive Amount by way of Adjustment to the Residue. The Discounted Incentive Amount is an amount calculated by reference to the Outstanding Incentives. If the obligation to provide the Lease Incentives under the Leases did not exist, the Trust would have expected to have generated additional profits from the letting out of the Commercial Property. Therefore, the payment of the Discounted Incentive Amount is a payment made by the Vendor to the Trust to 'fill the hole in profits' left by the foregone rental income. Consequently, the receipt of the Discounted Incentive Amount is in substitution of profits, and therefore takes on the character of ordinary income. As the receipt is ordinary income, it is assessable under section 6-5(1). | Detailed Reasoning - Question 2: Is the Discounted Incentive Amount included in the assessable income of the Trust under subsection 6-5(2) of the Income Tax Assessment Act 1997 in the 20XX income year? | Summary: Yes, as the amount was fully dealt with at settlement, it is assessable in that year. | Detailed Reasoning - Detailed reasoning: Under subsection 6-5(2), a taxpayer's assessable income includes ordinary income (i.e., income according to ordinary concepts) derived directly or indirectly from all sources, during the income year. Subsection 6-5(4) provides the following: (4) 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 is applied or dealt with in any way on your behalf or as you direct. In Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South Australia Ltd [1938] HCA 69 Dixon J stated at 155: Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form [sic]. | Detailed Reasoning - Application to the Circumstances: The Discounted Incentive Amount was received by way of an adjustment to the Residue on the Settlement Date. At that time, it was full applied and dealt with, as everything necessary has been done in order to become entitled to that amount. Although, the Discounted Incentive Amount was received in connection to the Outstanding Incentives, there is no general principle requiring symmetry between when expenditure is incurred, and corresponding income is derived. The fact that that the Outstanding Incentives are owed over a number of years has no bearing on when the Discounted Incentive Amount became fully realisable. Therefore, the Discounted Incentive Amount will be assessable in its entirety, in the 20XX income year. | Detailed Reasoning - Issue 2: Capital Gains Tax - Treatment of adjustment for lease incentives recoupment | Detailed Reasoning - Question 3: Does the Trust need to apportion the Purchase Price to each CGT asset acquired under the Contract on a reasonable basis in accordance with section 112-30 of the Income Tax Assessment Act 1997? | Summary: Yes, as the Purchase Price was paid to acquire multiple assets, the first element of the cost base of each CGT asset must only include the amount which is reasonably attributable to its acquisition. | Detailed Reasoning - Detailed reasoning: The general rules for determining capital gains and losses are contained within Part 3-1. Division 100 is a guide and provides a simplified outline of the capital gain and loss provisions. According to Division 100, you can only make a capital gain or loss if a CGT event happens. Most CGT events involve a CGT asset. You make a capital gain if you receive capital amounts from the event (capital proceeds) which exceed your total costs associated with that CGT event (cost base). On the other hand, you make a capital loss if your costs associated with the CGT event (reduced cost base) exceed the capital amounts you receive from the event (capital proceeds). Accordingly, most capital gains and losses are worked out in the following manner: • Work out your capital proceeds. • Work out the cost base for the CGT asset. • Subtract the cost base from the capital proceeds. • If the proceeds exceed the cost base, the difference is your capital gain. • If not, work out the reduced cost base for the asset. • If the reduced cost base exceeds the capital proceeds, the difference is your capital loss. • If the capital proceeds are less than the cost base but more than the reduced cost base you have neither a capital gain nor a capital loss. | Detailed Reasoning - Cost Base and Reduced Cost Base: Division 110 deals with the rules for determining the cost base and reduced cost base. The cost base and reduced cost base consist of 5 elements. According to section 110-55(2), all of the elements (except the third one) of the reduced cost base are the same as those for the cost base. The first element of the cost base in section 110-25 states the following: (2) The first element is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). Note 1: There are special rules for working out when you are required to pay money or give other property: see section 103-15. Note 2: This element is replaced with another amount in many situations: see Division 112. | Detailed Reasoning - Apportionment Rules: Division 112 provides for modifications to the general rules about the cost base and reduced cost base of a CGT asset in certain situations. Section 112-30(1) relevantly provides the following: | Detailed Reasoning - 112-30 Apportionment rules: Apportionment on acquisition of an asset (1) If you *acquire a *CGT asset because of a transaction and only part of the expenditure you incurred under the transaction relates to the acquisition of the asset, the first element of your *cost base and *reduced cost base of the asset is that part of the expenditure that is reasonably attributable to the acquisition of the asset. The expenditure can include giving property: see section 103-5. | Detailed Reasoning - Acquire: Section 995-1(1) relevantly provides that you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109. Under section 109-5, you generally acquire a CGT asset when you become its owner. In the case where an asset is disposed to you, the asset is acquired at the time the disposal contract is entered into. | Detailed Reasoning - CGT Assets: The term 'CGT asset' is defined in section 108-5 as follows: (1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. (2) To avoid doubt, these are CGT assets : (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). Note 1: Examples of CGT assets are: • land and buildings; • shares in a company and units in a unit trust; • options; • debts owed to you; • a right to enforce a contractual obligation; • foreign currency. Note 2: An asset is not a CGT asset if the asset was last acquired before 26 June 1992 and was not an asset for the purposes of former Part IIIA of the Income Tax Assessment Act 1936: see section 108-5 of the Income Tax (Transitional Provisions) Act 1997. | Detailed Reasoning - Application to the Circumstances: On the Contract Date the Trust entered into the Contract to acquire the Commercial Property and Leases for the Purchase Price. The Commercial Property consists of assets including land, buildings, and plant and equipment. A lease is a type of proprietary interest in property and is also a type of asset. However, the Purchase Price as defined in the Contract is not apportioned on an asset-by-asset basis. Under section 112-30(1), if a taxpayer acquires a CGT asset because of a transaction, and only part of the expenditure the taxpayer incurred under the transaction relates to the acquisition of the asset, the first element of the taxpayer's cost base and reduced cost base of the asset is that part of the expenditure that is 'reasonably attributable to the acquisition of the asset'. Therefore, as the Purchase Price was incurred to acquire multiple assets, the Trust must allocate the Purchase Price on a reasonable basis across each CGT asset. | Detailed Reasoning - Question 4: Does the first element of the cost base and reduced cost base of the Leases include the value of the for Outstanding Lease Incentives in accordance with the assumption of liability rule in section 112-35 of the Income Tax Assessment Act 1997 ? | Summary: Yes, the Outstanding Incentives are included in the cost base of the Leases in accordance with the assumption of liability rule in section 112-35. | Detailed Reasoning - Detailed reasoning: Division 110 deals with the rules for determining the cost base and reduced cost base. The cost base and reduced cost base consist of 5 elements. According to section 110-55(2), all of the elements (except the third one) of the reduced cost base are the same as those for the cost base. The first element of the cost base in subsection 110-25(2) states the following: (2) The first element is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). Division 112 provides for modifications to the general rules about the cost base and reduced cost base of a CGT asset in certain situations. Relevantly, section 112-35 states the following: | Detailed Reasoning - 112-35 Assumption of liability rule: If you acquire a CGT asset from another entity that is subject to a liability, the first element of your cost base and reduced cost base of the asset includes the amount of the liability you assume. | Detailed Reasoning - CGT Asset: The term 'CGT asset' is defined in section 108-5 as follows: (1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. (2) To avoid doubt, these are CGT assets : (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). Note 1: Examples of CGT assets are: • land and buildings; • shares in a company and units in a unit trust; • options; • debts owed to you; • a right to enforce a contractual obligation; • foreign currency. Note 2: An asset is not a CGT asset if the asset was last acquired before 26 June 1992 and was not an asset for the purposes of former Part IIIA of the Income Tax Assessment Act 1936: see section 108-5 of the Income Tax (Transitional Provisions) Act 1997. | Detailed Reasoning - Acquire: Section 995-1(1) relevantly provides that you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109. Under section 109-5, you generally acquire a CGT asset when you become its owner. In the case where an asset is disposed to you, the asset is acquired at the time the disposal contract is entered into. | Detailed Reasoning - Application to the Circumstances: On the Contract Date, the Trust executed the Contract to acquire the Commercial Property subject to existing leases. Prior to the sale, the Vendor had agreed to provide certain lease incentives which related solely to rent-free concessions. A lease is a type of proprietary interest in property and is a type of CGT asset. Under section 112-35, the first element of the cost base and reduced cost base of a CGT asset include any liabilities which were assumed when the asset was acquired. The lease incentives are a type of liability as they impose a legal obligation on the lessor to provide an economic benefit in the form of a rent-free period to the lessee. When the Trust acquired the Leases, it assumed that liability to provide the rent-free concessions to the tenants. As the Leases are CGT assets which are subject to a liability, the first element of the cost base will include the amount of liability assumed under each lease in accordance with section 112-35.

Reasons for decision: Assessable Income - Treatment of Discounted Incentive Amount | All references are to the Income Tax Assessment Act 1997 unless otherwise stated.