Private ruling: Holding Fee
Date of advice: 24 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the holding fee assessable income when it is received from a lot holder? | A1: No. | Q2: Is the holding fee assessable income when the option to purchase a lot is exercised? | A2: Yes. | Q3: Is the non-refunded holding fee assessable income when the lot holder breaches the terms of the holding agreement (the agreement)? | A3: Yes. | Q4: Is the refunded holding fee assessable income when the developer elects to terminate the agreement or fails to obtain the development approval? | A4: No.



Reasons for decision: Summary: Section 6-5 of the ITAA 1997 requires an amount of ordinary income to be brought to account as assessable income when it has been derived. Derivation of income depends on whether a gain has 'come home' to the taxpayer. As general rule, it is accepted that the question of when income is derived by a taxpayer, as noted by Gibb J in Brent v. FC of T (1971) 125 CLR 418; 2 ATR 563; 71 ATC 4195: ... is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which 'is calculated to give a substantially correct reflex of the taxpayer's true income'. This rule has emerged from Dixon J's observation, in Commissioner of Taxation (South Australia) v. Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; (1938) 5 ATD 98 that: ...the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income. Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form. This principle was endorsed in, amongst other cases, Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314; 14 ATD 98; (1965) 9 AITR 673 ( Murray's case ) and Country Magazine Pty Ltd v. Federal Commissioner of Taxation (1968) 117 CLR 162; 15 ATD 86; (1968) 10 AITR 573 ( Country Magazine 's case). Murray's case involved a taxpayer who carried on a business of giving dancing tuitions. The taxpayer often received payments for tuition courses in advance. Whilst students did not have a contractual right to refunds, the taxpayer occasionally made refunds. The taxpayer lodged their income tax returns on the basis that payments received in advance of lessons taught did not form part of its assessable income immediately upon receipt. The payments were only assessable once earned by the giving of the lessons. In deciding in Murray's case that amounts received in advance for dancing lessons were not derived until the lessons were actually given, the Court found that the circumstances of the receipt made it 'necessary as a matter of good business sense' that the taxpayer should treat fees received but not yet earned 'as subject to the contingency that the whole or some part of it may have to be paid back', even if only as damages, if the taxpayer failed to render agreed services'. As noted in the cases above the derivation of income depends on whether a gain has 'come home' to taxpayer. In the developer's case, the lot holder pays a holding fee to reserve a block of land subject to development approval provided by the relevant authorities either within a period as noted under the agreement. A review of the agreement would indicate that the holding fee has not been derived at the time the holding fee is paid. The holding fee is considered to be derived when certain conditions under terms of the agreement have been met or acted upon either by the company or by the lot holder. For example following the approval of the development and the lot holder exercises their option. In circumstances where there is a non-refunding of the holding fee by the developer as a result of a breach of the agreement by the lot holder or the terminating of the agreement by the developer, the holding fee is considered to be derived under the terms of the agreement and is included as part of the developer's assessable income. Further, in circumstances where development approval in not granted or the contract is terminated and as a result there is a refunding of the holding fee to a lot holder by the developer, the payment of the holding fee is not considered to be derived when it was received or under the terms of the agreement. Therefore the holding fee is not required to be included as part of the developer's assessable income.

Relevant facts: An entity operates a property development business (the developer). | The developer has acquired an interest in a property development. | Under the agreement the entity will provide an option to a lot holder to purchase a lot subject to development approval. | Under the terms of the agreement the lot holder pays a holding fee which is refundable in certain circumstances. It is not refundable if the lot holder exercises the option to purchase or if they breach the terms of the holding agreement. | Relevant legislative provision: Income Tax Assessment Act 1997 section 6-5