Private ruling: Assessability of payments
Published: May 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the payments you receive from the sale of residential properties under instalment sales contracts included in your assessable income under section 6-5 of the ITAA 1997 Answer: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5 | Income Tax Assessment Act 1997 Subsection 70-10 | Income Tax Assessment Act 1997 Subsection 70-80(1)

Reasons for decision: Summary: Subsection 6-5(1) of the ITAA 1997 includes income according to ordinary concepts (ordinary income) in your assessable income. Subsection 70-80(1) of the ITAA 1997 includes as ordinary income amounts derived from the disposal of trading stock in the ordinary course of carrying on a business. The term 'trading stock' is defined in section 70-10 of the ITAA 1997 as including anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of carrying on a business. Since the decision of the High Court in St Hubert's Island Pty Ltd v. Federal Commissioner of Taxation (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 it has been clear that land may be 'trading stock'. Paragraph 1.9 of the Supplementary Explanatory Memorandum - Senate, which accompanied the Tax Law Improvement Act 1997 stated that 'The expression "in the ordinary course of a business" was added to the definition to make clear that merely holding an asset for manufacture, sale or exchange will not make it trading stock.' In John v. Federal Commissioner of Taxation (1989) 166 CLR 417 at 429; (1989) 20 ATR 1 at 8; 89 ATC 4101 at 4107 (the John Case) the majority of the High Court held that an item will be trading stock if 'the person is a trader in the goods which are claimed to be trading stock.' In addition, in the John Case the High Court stated that the relevant purpose did not need to be a dominant purpose. The company is intending to engage in a business activity that consists of selling residential properties under instalment contracts. The property titles will eventually transfer to the lessees within a twenty year period. The properties will be held for the purpose of sale in the ordinary course of the company's business of selling residential properties under instalment contracts. Accordingly, the residential properties held by the taxpayer and sold under instalment sales contracts are 'trading stock' for the purposes of section 70-10 of the ITAA 1997. As such, the lease deposit payments you receive from lessees will be income according to ordinary concepts and assessable under 6-5(1) of the ITAA 1997.