Private ruling: Assessable Income from rental of property
Date of advice: 21 March 2017
Published: August 2017
Ruling period: Financial year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the lump sum amount received as settlement for arrears of occupational rent considered assessable income? | A1: Yes. | Q2: Is the ongoing weekly amount received as occupational rent considered assessable income? | A2: Yes.

Relevant facts and circumstances: You are the registered owner of a rural property. The property was your family home and was used to raise farm animals over your parent's and your lifetime. A person, who is not a relative of yours, was employed to carry out work on the property. That person has been acting as manager of the farm and residing on the property since that time. That person runs their own cattle on your property. You moved to an aged care facility. You requested, through lawyers, that person pay agistment. This request was refused. You requested, in writing, that person pay remuneration of a monthly amount for the use of your land for agistment and the use of your land for residence. These requests were not responded to. You commenced legal action to force that person to pay the amounts requested. You and that person then signed a deed of agreement setting out the terms on which that person may continue to reside on the farm. The deed species that a lump sum payment will be made and ongoing weekly payments will be made and that the payments are in satisfaction of any claims you may have against that person for any occupation rent prior to the date of the deed.

Relevant legislative provisions: Section 6-5(1) of the Income Tax Assessment Act 1997 | Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Ordinarily, where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income. | Detailed Reasoning - Detailed reasoning: Section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts, which is called ordinary income. Taxation Ruling No. IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases (TR IT 2167) states that; ordinarily, where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income. Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms length situation. In FCT v Groser, 82 ATC 4478: 13 ATR 445 , for example, the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brother's maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayer's house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution to the funds out of which the taxpayer proposed to maintain his brother. The arrangements were simply not of a kind which produced a receipt of income as that term is normally understood. It is considered that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income. If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in FCT v Groser referred to earlier, the rent would represent assessable income. One such circumstance is illustrated in FCT v Kowal, 84 ATC 4001: 15 ATR 125 where the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. The Court further found that the second purpose or object was the predominant one. Your situation is more comparable to the Kowal case rather than the Groser case. Relating this case to your circumstances it is considered that your primary purpose for entering into the deed and charging rent from that person to live and farm on your property is to produce income. As such the lump sum amount you received as settlement for arrears of occupational rent is considered assessable income. Similarly the ongoing weekly amount you receive as ongoing occupational rent is considered assessable income.