Private ruling: Annuity payments
Published: June 2012
Ruling period: Year ending 30 June 2012 Year ending 30 June 2013 Year ending 30 June 2014 Year ending 30 June 2015 Year ending 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for annuity payments made to a related party? | A1: No.

Relevant facts and circumstances: A related party owned land. You and the related party entered an agreement where they would transfer the title of the land to you. In exchange, you agreed to pay them an annuity for the remainder of their lives. The land is being farmed by a trust which you control. You are currently negotiating a rental agreement with the trust for the ongoing use of the farm land. This will result in rental income being taxable to you.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: You are not entitled to claim a deduction for the annuity paid to the related party as the annuity payments are considered to be capital in nature. The payments are for the purchase of a capital asset. The fact that you will earn rental income from the land does not make the payments revenue in nature. | Detailed Reasoning - Detailed reasoning: A deduction is generally allowable for expenses incurred in earning assessable income. No deduction is allowable where the expenses are of a capital, domestic or private nature. The Courts have laid down guidelines for distinguishing capital and revenue expenses. In examining an expense, three elements are looked at: · the nature of the advantage sought · the way it is to be used or enjoyed, and · the means adopted to get it. Where the expense results in an asset being brought into existence, the expenditure is likely to be capital in nature. Similarly, where the expense is a single payment for the future use or enjoyment of the asset, the expenditure is likely to be capital. However, it is possible for periodic payments to be capital where they are payments for the acquisition of an asset. For example, a person enters into a contract to purchase a house which they will rent. Under the contract the person will pay the vendor a deposit and then monthly payments until the purchase price has been paid. The monthly payments are capital in nature as they represent part of the purchase price of the house. No deduction would be allowable for the payments as they result in the acquisition of an asset. In your case, the related party transferred land to you in exchange for an annuity to be paid for the rest of their lives. The Commissioner considers the annuity payments are consideration for the transfer of the land, that is, they are equivalent to the purchase price of the land. This is not altered by the fact that the total consideration for the land was unknown at the time you entered the agreement with the related party. As you have acquired a capital asset whose ownership was transferred to you in exchange for the annuity payments, these payments are capital in nature. The fact that you intend to rent the land to a related trust does not change the character of the payments from capital to revenue. The annuity payments are not incurred in earning assessable rental income. Therefore, no deduction is allowable for the annuity payments are they are capital in nature.

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