Assessable income: sale of residential property under an instalment contract

Are weekly instalments received in relation to the sale of a residential property ordinary income and included in assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The weekly instalments are capital receipts and therefore not included in assessable income under section 6-5 of the ITAA 1997.

The taxpayer owned a residential property.

The taxpayer entered into an agreement for the sale of the property. The agreement provided that: • The purchaser pays a deposit at the time of entering the contract. • Settlement of the contract does not take place until 85 months later at which time title to the property is transferred. • The purchaser has a right to occupy the property prior to settlement. • The purchaser pays a weekly amount (specified in the contract as 'rent') for the right to occupy the property. • From the time of entering into the contract the purchaser agrees to pay council rates and taxes and insurance on the property. • The balance of the purchase price to be paid on settlement of the contract is reduced by the weekly instalments. • If the purchaser fails to complete the purchase, the deposit and weekly instalments are forfeited.

It is generally accepted that rent is ordinary income and included in assessable income under section 6-5 of the ITAA 1997.

However, if the weekly instalments represent instalments of the sale price they will be capital receipts and not ordinary income ( Foley v. Fletcher (1858) 157 ER 678).

In determining whether or not a payment is rent, it is the reality or substance of the matter, rather than the label given by the parties to the transaction which is decisive ( Ex parte Lathouras; Re Vendardos [1964-1965] NSWR 254).

Assistance in determining the nature of the receipts can be also be obtained from the decision in Poole; Dight v. Federal Commissioner of Taxation (1970) 122 CLR 427; 70 ATC 4047; (1970) 1 ATR 715. In that case, the issue was whether payments under a freehold lease, under which the lessee had a right to acquire the estate in fee simple, were revenue or capital in nature. Walsh J at ATC 4053; ATR 721 stated: If land is purchased either on terms that possession is to be given upon completion of the sale by payment of the full purchase price or on terms that payment is deferred, but the purchaser is let into possession, no doubt the rights acquired by the purchaser include the right to occupy and use the land. In the latter case a purchaser would ordinarily be required either to pay interest on the unpaid purchase money or to pay an occupation fee pending completion. But in either case the central feature of the transaction is the acquisition of the land as an asset to which the purchaser obtains a title either at law or equity...

The Commissioner considers that the true nature of the agreement is an instalment contract for the sale of the property. The purchase price is paid in instalments with transfer taking place once the full purchase price is paid. The agreement is not a lease, and even though the weekly instalments may be referred to as 'rent', they are in fact instalments of the sale price.

In view of the above, the taxpayer is not assessable on the weekly instalments under section 6-5 of the ITAA 1997 as they are receipts of a capital nature.