Taxation Ruling IT 2496 - Income tax : deductibility of the cost of lease receivables

What this ruling is about: This Ruling deals with the deductibility of expenditure incurred by a limited partnership to acquire income receivables. An example of such an acquisition is the assignment for consideration of rights to rental income under an existing lease of property. 2. The legal principles that govern the transfer of rights apply to proprietary rights, including choses in action. A presently existing right to future income from property, such as rent under an existing lease, is a chose in action which is assignable in law or in equity. Where the agreement involves an equitable assignment then the assignor becomes trustee for the assignee (per Mason J. in Booth v FC of T 87 ATC 5100 at 5102; 19 ATR 514 at 517). 3. Consideration was recently given to highly geared arrangements whereby taxpayers who become partners in a limited partnership claim deductions for partnership losses arising from the purchase or assignment for consideration of lease receivables. One such arrangement is outlined below: 4. A partner is not guaranteed a return at the end of the 15 year period when the partnership is terminated. This will be dependent upon the rate of interest on the loans and the rate of discount obtained on the purchases of the lease receivables. Unless a partner exercises the option of requiring the general partner to repurchase his or her partnership interest, the partner will not obtain any tangible benefit from the partnership for a considerable period.


Ruling: 5. The limited partnership in acquiring lease receivables is purchasing income producing property, being choses in action which generate future income when the rentals become due and payable in accordance with the lease agreements. The choses in action are the partnership assets that generate the income. Accordingly, it is considered they represent the "sources of income" or "the profit-yielding subject" in the sense in which Dixon J. (as he was then) used those descriptions in Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337 at pp.359-360. The assets acquired produce a benefit which endures for the period of the leases to which the assignments relate. It follows that the cost of acquiring the lease receivables is not deductible under subsection 51(1), being expenditure of a capital nature. 6. The management fee is a part of a larger amount paid as a capital contribution to the partnership by each limited partner. Where it is paid out of partnership capital the management fee is not a deductible expense to the partnership as it represents the payment of remuneration to the general partner (see Taxation Ruling No. IT 2218). Where it is paid by each limited partner, it represents a cost of entry to the partnership and is accordingly of a capital nature. Furthermore, it is not considered that the management fee is incurred in or for the purpose of gaining or producing assessable income and is not a deductible expense under subsection 51(1). 7. Having regard to the tax advantages sought in the arrangements outlined in paragraph 3 no assurance can be given that Part IVA will not apply. COMMISSIONER OF TAXATION 29 September 1988




Date of effect: Immediate


Legislative references: 51(1), 92(2) Part IVA
Case references: Booth v FC of T 87 ATC 5100 19 ATR 514
Subject references: LEASE RECEIVABLES LIMITED PARTNERSHIPS