Private ruling: CGT - make good payment
Date of advice: 15 February 2017
Published: July 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the receipt of the payment for settlement of the 'making good obligations' be assessable under the Capital Gains Tax (CGT) provisions? | A1: Yes | Q2: Will the receipt of the payment for settlement of the 'making good obligations' be assessable under section 15-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: Will the anti-overlap provisions under section 118-20 of the ITAA 1997 apply? | A3: Yes

Relevant facts and circumstances: You own a commercial property. Your commercial property was leased to a tenant until the lease expired. During the lease period, the tenant used the property for the purpose of producing assessable income. Clause 12.3 of the lease imposes an obligation on the lessee to return the property to the lessor at the end of the lease in the state and condition required under clause 7 of the lease and to 'remove any goods and anything that the lessee fixed to the property and have made good any damage caused by the removal'. Clause 12.3 of the lease provides the lessor the ability to charge the lessee the cost of removal, making good and disposal of any property remaining at the end of the lease period. After the lessee moved out of the property, you received $XX,XXX from the lessee as payment to settle their obligation to satisfy the make good requirement under the lease.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-25 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(1) | Income Tax Assessment Act 1997 section 118-20

Reasons for decision: Summary: Section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules dealing with Capital Gains Tax (CGT) event C2. CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited (subsection 104-25(1) of the ITAA 1997). In your case, you received payment from the lessee to settle their obligation under clause 12.3 of the lease to make good any repairs required on the property at the expiration of the lease. By accepting this payment, CGT event C2 is triggered as you have surrendered your right under the lease to seek further compensation in the form of a charge on the lessee for 'the cost of removal, making good and disposal of any remaining property'. Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has been held to include income from providing 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 or relied upon ● have an element of periodicity, recurrence or regularity ● replace income. As the payment received was not earned, is not expected or relied upon, is a once off payment and does not replace income, the receipt of the payment would not be considered ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that your assessable income also includes some amounts that are not ordinary income, but are included in your assessable income by the operation of another provision, referred to as statutory income. Section 15-25 of the ITAA 1997 specifically states: Your assessable income includes an amount you receive from an entity if: (a) you receive it as a lessor or former lessor of premises; and (b) the entity pays you the amount for failing to comply with a lease obligation to make repairs to the premises; and (c) the entity uses or has used the premises for the purpose of producing assessable income; and (d) the amount is not assessable as ordinary income under section 6-5 In your case, you received the payment of $XX,XXX from the lessee in your capacity as the lessor. The payment was made to settle the lessee's obligation under the lease to make required repairs to the property and the property was used by the lessee for the purpose of producing assessable income. As you meet all the requirements of section 15-25 of the ITAA 1997 the $XX,XXX payment will be included in your assessable income in the year in which it was received as statutory income. Section 118-20 of the ITAA 1997 is aimed at preventing double taxation by reducing a capital gain arising from a CGT event to the extent that an amount has already been included in the assessable income, or the exempt income, of the taxpayer. As this payment is included in your assessable income under section 15-25 of the ITAA 1997, any capital gain made would be reduced by this payment amount.