Private ruling: Assessability of lump sum payment
Published: December 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | 1. Will the payment made on entering into the agreement be assessable under the capital gains tax provisions of the Income Tax Assessment Act 1997 ? | No. | 2. Will the payment made on entering into the agreement be assessable as ordinary income? | No.

Relevant facts and circumstances: You and your family occupy a dwelling as your main family residence. You intend to erect a subsidiary dwelling within the footprint of the roof of the existing dwelling. The subsidiary dwelling, or flat, will be capable of being occupied independently of the main dwelling and will comprise of a shared laundry, bathroom, living area, dining room, bedroom, kitchen and a garage. It is proposed that you and a relative will enter into a written agreement in which your relative will acquire a personal right of residence of the subsidiary dwelling. Your relative will pay you a lump sum amount in exchange for the personal right of residence. However, the payment will be returned either: • on 12 weeks written notice from your relative that the arrangement is at an end; or • upon your relative's death, to their estate. The subsidiary dwelling will be the principal place of residence of your relative for Centrelink purposes; however, your relative will at no time be a legal owner in full or in part under the agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 104-35(1) | Income Tax Assessment Act 1997 subsection 104-35(5)(a)

Reasons for decision: Summary: The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). Statutory income is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997). Under the capital gains tax provisions, CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity (subsection 104-35(1) of the ITAA 1997). However, CGT event D1 does not happen where you create the right by borrowing money or obtaining credit from another entity (subsection 104-35(5)(a) of the ITAA 1997). The Commissioner's view on the consequences of creating a contractual right to reside in property is contained in Taxation Ruling 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/14). Paragraph 105 of TR 2006/14 explains that CGT event D1 will happen when a personal right to reside in a property for life, or a term of years, is granted by way of a legal agreement. However, CGT event D1 will not happen in the contrasting situation where an informal arrangement is in place in which relatives may reside at each other's dwellings for a period of time but there is no intention to create legal relations. In your case, you intend to enter into a written agreement in which your relative will pay you a lump sum amount in return for acquiring a personal right to reside in a subsidiary dwelling you will construct on your property. Consequently, CGT event D1 would usually happen as a consequence of the agreement. However, the payment will be returned either on 12 weeks written notice from your relative that the arrangement is at an end, or upon your relative's death, to the estate. From the above, the payment you receive will constitute a loan as you will have a legal obligation to repay the amount at some future time. Further, you will not actually be deriving any gain specifically from creating the right to reside as there will be a legal obligation for you to repay the amount in full in the future. Therefore, under subsection 104-35(5)(a) of the ITAA 1997, CGT event D1 will not happen when you enter into the agreement as you will be creating the right by borrowing money. Further, there are no other provisions in the capital gains tax legislation that will make the payment assessable. Ordinary income is income according to ordinary concepts (section 6-5 of the ITAA 1997). 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. The payment you will receive under the agreement will not be assessable as ordinary income as it will be a one-off lump sum payment that constitutes a loan.