Product Ruling PR 2023/5
Date of effect: 1 July 2022

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities that participates in the scheme to which this Product Ruling relates. All legislative references in this Product Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. 2. In this Product Ruling, the scheme involves entry into either a concurrent lease with Future Rent Capital Pty Ltd (Future Rent) over a property (the Property) that is subject to a current residential tenancy agreement or a head lease with Future Rent over the Property that allows Future Rent to grant a residential tenancy agreement to prospective tenants. [1] 3. This Product Ruling does not address:

Class of entities or scheme: 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. Those entities that can rely on the Ruling section are referred to as Owners. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that enter into the scheme described in paragraphs 16 to 20 of this Product Ruling on or after 1 July 2022 and on or before 30 June 2025. 6. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that are: | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of the SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then this Product Ruling:

Ruling: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities that participates in the scheme to which this Product Ruling relates. All legislative references in this Product Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. 2. In this Product Ruling, the scheme involves entry into either a concurrent lease with Future Rent Capital Pty Ltd (Future Rent) over a property (the Property) that is subject to a current residential tenancy agreement or a head lease with Future Rent over the Property that allows Future Rent to grant a residential tenancy agreement to prospective tenants. [1] 3. This Product Ruling does not address: | Class of entities: 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. Those entities that can rely on the Ruling section are referred to as Owners. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that enter into the scheme described in paragraphs 16 to 20 of this Product Ruling on or after 1 July 2022 and on or before 30 June 2025. 6. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that are: | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of the SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then this Product Ruling:


Appendix: Assessability of Concurrent Lease Rent and Head Lease Rent: 21. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer. Rental income is regarded as ordinary assessable income. 22. Pursuant to subsection 6-5(2), ordinary income is included in the assessable income of an Owner when it is derived by that Owner. The word 'derived' is not defined under the Income Tax Assessment Act 1997 but is equivalent to 'arising or accruing' (Harding v Federal Commissioner of Taxation [1917] HCA 13). Income is taken to be derived when it has 'come home' to the Owner; that is to say it has been earned and, depending on the nature of the source of the income, there is sufficient certainty as to its being realised (Commissioner of Taxes (SA) v Executor Trustee and Agency Company of South Australia Limited [1938] HCA 69 (Carden's case). Such certainty is determined by reference to not only legal rights and obligations but also business and commercial realities (Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation (Cth) [1965] HCA 58). 23. The time at which an amount represents 'income derived' by an Owner depends on the nature of the income and the circumstances in which it is derived. Further, the accounting method to be used in determining when income is derived depends on its 'actual appropriateness' and, in particular, on 'whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income' (Carden's case). 24. The appropriate accounting method to be used to account for a prepayment of rent as ordinary income has been considered by the Taxation Board of Review. In Case B47 70 ATC 236, the Taxation Board of Review, by majority, found that the prepaid rent under the lease in question, which provided for the repayment by the lessor to the lessee of any unexpired proportion of rent calculated at a weekly rate where the lease was terminated other than in the case of the lessee's default or breach, did not come home to the lessor when received by them so as to constitute income derived at the time of receipt, and should be apportioned over the term of the lease. 25. That decision was distinguishable from that held by the Taxation Board of Review in Case 51 70 ATC 253 where the lessor, having received the rent in advance per the terms of the lease agreement in question, was under no obligation to refund any part of it. In this case, the Taxation Board of Review concluded that there was no ground for a view that the lessor did not derive the whole of the rent when it was paid to them. 26. The existence (or otherwise) of the lessee's right to a pro rata refund for the unexpired portion of the term was emphasised as the critical feature in both cases. The Commissioner similarly confirmed in Taxation Ruling TR 2002/14 Income tax: taxation of retirement village operators that rent, paid by a resident granted a lease in a retirement village, in advance and subject to a pro rata refund upon early termination of the lease, should be brought to account over the period for which the payment is made. 27. As per subparagraph 19(t) of this Product Ruling, the Lease requires the Owner to refund the Rental Refund Amount (being a portion of the Rental Prepayment) on early surrender or termination of the Lease (other than a surrender under the circumstances set out in sub-subparagraph 19(o)(i) of this Product Ruling). The Rental Refund Amount lessens over the term of the Concurrent Lease as rent is collected by Future Rent under the Residential Lease. 28. The existence of this broad right of refund under the Lease means that the Rental Prepayment paid by Future Rent to the Owner in advance for the Permitted Use over the fixed Lease Term does not 'come home' to the Owner in a realised or immediately realisable form (that is, is not derived) at the time of receipt. Accounting for the Rental Prepayment as assessable ordinary income on an accruals basis over the term of the Lease, as and when it periodically and proportionately ceases to be subject to the refund right, will provide the most substantially correct reflex of that income for the Owner. 29. The Additional Rent paid to the Managing Agent on behalf of the Owner by Future Rent on a monthly basis is not refundable, and will have come home to the Owner in a realised or immediately realisable form (that is, be derived) at that time. | Deductibility of amounts incurred by the Owner: 30. A loss or outgoing is deductible under section 8-1 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. 31. Any Management and Administration Fee incurred by the Owner under the Lease is paid for Future Rent's time and resources in reviewing and processing the Owner's Lease application. It has a sufficient connection with the gaining of assessable income or, where applicable, with the carrying on of a business for the purpose of gaining assessable income, being the Concurrent Lease Rent or Head Lease Rent, to be deductible under section 8-1 in the income year in which it is incurred. The Management and Administration Fee is not a payment by the Owner for the surrender or termination of the Lease and is therefore not of a capital nature. 32. Any amounts paid by the Owner to reimburse Future Rent for any Rectification Costs incurred by Future Rent under the Lease are, pursuant to the assumption at subparagraph 20(b) of this Product Ruling, in respect of repairs to the Property (or part of the Property) from which the Owner is deriving assessable Concurrent Lease Rent or Head Lease Rent, and therefore have a sufficient connection with the gaining of assessable income or, where applicable, with the carrying on of a business for the purpose of gaining assessable income, to be deductible under section 8-1 in the income year incurred. | Grant of the Lease: 33. The granting of the Lease by the Owner to Future Rent gives rise to a CGT event F1 under section 104-110 in respect of the Owner. 34. A capital gain from this CGT event may be made if the capital proceeds from the grant of the lease exceed the expenditure incurred to grant it or, alternatively, a capital loss from this CGT event may be made if those capital proceeds are less than the expenditure incurred to grant it (subsection 104-110(3)). 35. The capital proceeds from CGT event F1 are any premium paid or payable for the grant of the lease (subsection 116-20(2)). 36. The Rental Prepayment payable to the Owner is a prepayment of rent (that is, a prepayment for the ongoing use of the Property to collect rent from the Residential Lease during the Lease Term), and not a premium (that is, consideration paid for the grant of the Lease). Factors supporting this conclusion include the: 37. On the basis that the Owner will not be paid a premium (capital proceeds) for the grant of the Lease to Future Rent, they will not make a capital gain under subsection 104-110(3) from the CGT event F1. | Assignment of rights: 38. Contractual rights under a lease or other agreement (such as the Existing Lease and the Existing Management Agreement) are legally enforceable rights and therefore a CGT asset according to the definition in subsection 108-5(1). 39. An assignment by the Owner of their Owner Rights to Future Rent pursuant to the Concurrent Lease and an assignment by the Owner of their rights under the Existing Management Agreement to Future Rent pursuant to the Head Lease gives rise to CGT event A1 under section 104-10. A capital gain from this CGT event may be made if the capital proceeds from the disposal of the asset are more than the asset's cost base or, alternatively, a capital loss from this CGT event may be made if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4)). 40. Generally, where no capital proceeds are received from a CGT event the market value substitution rule in subsection 116-30(1) will apply to include the market value of the CGT asset that is the subject of the event (as at the time of the event) as the amount received. 41. As the Owner will not receive any capital proceeds for the assignment of their rights, the Owner will be taken to have received the market value of the rights as at the time of the assignment pursuant to the market value substitution rule. 42. On the basis that the rights have a market value of nil (in accordance with the assumption at subparagraph 20(e) of this Product Ruling), the Owner's capital proceeds from their assignment will be nil and the Owner will not make a capital gain under subsection 104-10(4) from the CGT event A1. | Surrender or termination of the Lease: 43. The rights of the Owner under the Lease are legally enforceable rights and therefore, in their totality, a CGT asset according to the definition in subsection 108-5(1). 44. Where the Lease is surrendered or terminated, the Owner's ownership of the contractual rights under the Lease is discharged or satisfied. This discharge or satisfaction of the contractual rights gives rise to CGT event C2 under paragraph 104-25(1)(b). 45. A capital gain from this CGT event may be made if the capital proceeds from the ending of the ownership of the asset are more than the asset's cost base or, alternatively, a capital loss may be made from this CGT event if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). 46. As the Owner will not receive any capital proceeds for the discharge or satisfaction of their rights under the Lease on surrender or termination of the Lease, as the case may be, the Owner will be taken to have received the market value of those rights as at the time of their discharge or satisfaction, and as if the event hadn't occurred and was never proposed to occur, pursuant to the market value substitution rule in subsections 116-30(1) and (3A). 47. On the basis that the Owner's rights under the Lease will have a negligible market value at the time of their discharge or satisfaction (in accordance with the assumption at subparagraph 20(f) of this Product Ruling), the Owner is likely to make a capital loss to the extent to which the reduced cost base of the rights under the Lease exceed their market value. | Application of the goods and services tax provisions to the Owner: 48. Goods and services tax (GST) is not payable on a supply that is input taxed (section 40-1 of the GST Act). A supply is input taxed if it is input taxed under Division 40 of the GST Act (paragraph 9-30(2)(a) of the GST Act). 49. Section 40-35 of the GST Act provides that a supply of premises that is by way of lease (other than a long-term lease, as defined in section 195-1 of the GST Act) is input taxed: 50. Pursuant to the assumptions at subparagraphs 20(c) and (d) of this Product Ruling, the supply of the Property by the Owner to Future Rent by way of the Lease is input-taxed in accordance with section 40-35 of the GST Act and therefore not one on which GST is payable by the Owner, nor one that gives rise to an entitlement to an input tax credit for anything acquired to make the supply. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


What this Ruling is about | If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | Date of effect: 10. This Product Ruling applies from 1 July 2022. It applies only to the specified class of entities that enter into the scheme from 1 July 2022 until 30 June 2025, being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. | 11. However, the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 12. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. | 13. Entities that participate in the scheme are advised to confirm with their tax adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 14. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention, the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. | 15. Subject to paragraph 3 of this Product Ruling and the assumptions in paragraph 20 of this Product Ruling: | 16. The scheme that is the subject of this Product Ruling is identified and described in the following: | Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. | 17. For the purposes of describing the scheme to which this Product Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which an Owner or an associate of an Owner, will be a party to, which are a part of the scheme. | 18. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. | Overview: 19. Following is a summary of the scheme: | 20. This Product Ruling is made on the basis of the following necessary assumptions: | Commissioner of Taxation 24 May 2023 | Application of the capital gains tax provisions to the Owner


Related rulings: PR 2018/9 TR 2002/14
Legislative references: ITAA 1936 Pt IVA ITAA 1997 6-5 ITAA 1997 6-5(2) ITAA 1997 8-1 ITAA 1997 25-10 ITAA 1997 104-10 ITAA 1997 104-10(4) ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(3) ITAA 1997 104-110 ITAA 1997 104-110(3) ITAA 1997 108-5(1) ITAA 1997 116-20(2) ITAA 1997 116-30(1) ITAA 1997 116-30(3A) ITAA 1997 Div 230 ITAA 1997 230-460(2)(d) ANTS(GST)A 1999 9-30(2)(a) ANTS(GST)A 1999 Div 40 ANTS(GST)A 1999 40-1 ANTS(GST)A 1999 40-35 ANTS(GST)A 1999 195-1 SISA 1993
Case references: Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation [1965] HCA 58 (1965) 114 CLR 314 14 ATD 98