Private ruling: Assessable income
Date of advice: 15 January 2016
Published: March 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is your share of a lump sum paid to you as a result of a settlement for Court proceedings for unpaid rent assessable income? | A1: Yes

Relevant facts and circumstances: You own a rental property. Your tenants failed to pay rent for some time. You initiated Court proceedings against the tenants in respect of unpaid rent. Consent orders were made by the court in which the defendants were required to pay a sum of in the 20XX financial year. Upon payment a Notice of Discontinuance was to be filed in relation to the legal proceedings

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. 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; and • Have an element of periodicity, recurrence or regularity. Payment of rent is income according to ordinary concepts and is included in assessable income under section 6-5 of the ITAA 1997. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income: • if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or • to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. In your case, the payment is compensation for loss of income from unpaid rent which we consider to be ordinary income and is included in assessable income under section 6-5 of the ITAA 1997.