Assessability of lump sum payment - for lifetime right to reside in a property

Is a lump sum amount received by the taxpayer, for granting a lifetime right to reside in a property, ordinary income for the purposes of section 6-5 of the Income Tax Assessment Act (ITAA 1997)?

No. A lump sum amount received by the taxpayer, for granting a lifetime right to reside in a property, is not ordinary income for the purposes of section 6-5 of the ITAA 1997.

The taxpayer owns an investment property.

The taxpayer granted their relative the right to live in this property rent free.

In return for this the relative gave the taxpayer the lump sum proceeds from the sale of their previous home.

There was no formal agreement entered into between the parties. No lease agreement was entered into.

There were no conditions attached to the payment of the lump sum under which the lump sum or any portion thereof had to be repaid to the relative.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income is defined as income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997). Factors like periodicity, recurrence or regularity, and services performed have been identified by the courts as indicating that an amount is income according to ordinary concepts. However, an amount received in a lump sum can also be ordinary income depending on the nature of the lump sum payment.

If the purpose of the lump sum payment is to provide a substitute for an income stream then that lump sum may take on the character of those payments it is intended to replace.

In the circumstances here, the issue is whether this lump sum was intended to replace future rental income and whether it amounted to a lump sum payment of prepaid rent.

We can take some guidance on this issue from Taxation Ruling TR 2002/14 which deals with the characterisation of receipts on the grant of occupancy rights in the context of retirement villages. Although this ruling applies to the taxation of retirement village operators the principles discussed in determining whether an amount is prepaid rent are relevant here.

Paragraph 129 of TR 2002/14 summarises the circumstances where a lump sum should be accounted for as prepaid rent as being where: • a person is prepared to make a lump sum payment in exchange for the right to occupy a dwelling for a fixed term; • a person is entitled to receive a pro-rata refund for the unexpired portion of the term (if any); and • the intention of the parties is that the lump sum payment in advance is for the person's use and enjoyment of the dwelling for the fixed term.

In the circumstances here, the taxpayer has received the lump sum payment for granting their relative the right to occupy the property. This right to occupy is for an indeterminate period being the life of the relative. It is not for a fixed term.

The taxpayer is not required to refund the amount or any portion of the amount, regardless of how long the property is occupied.

While the payment will allow the relative to have the use and enjoyment of the dwelling, the amount is not calculated by reference to their use for a fixed term. There is no relationship to any weekly or other periodic amount of rent.

This amount has been paid as a consideration for the grant of the right to occupy, rather than as a payment intended as rent for the use of the property. Therefore, the lump sum payment does not have the character of prepaid rent. It is not received by the taxpayer in substitution for future amounts of ordinary income (that is rent) and therefore, does not take the character of ordinary income.

Accordingly, the lump sum amount received by the taxpayer is not assessable under section 6-5 of the ITAA 1997.

Any potential capital gains tax consequences of granting a lifetime right to reside in a property are discussed in Taxation Ruling TR 2006/14.

Date of amendment Part Comment 29 January 2016 Reasons for Decision Amended for clarity. Related public rulings Included reference to TR 2006/14.

Date of amendment | Part | Comment

29 January 2016 | Reasons for Decision | Amended for clarity.

Related public rulings | Included reference to TR 2006/14.