Refund of deposit: received by a purchaser as an assessable recoupment

Is a refund of a deposit received by the taxpayer upon the termination of a contract to acquire property in connection with the development of a retirement village, where the taxpayer has deducted the amount of the deposit in the income year that it was paid, an assessable recoupment under subsection 20-20(2) of the Income Tax Assessment Act1997 (ITAA 1997), if the refund is not ordinary income?

Yes. The refund of such a deposit is an assessable recoupment under subsection 20-20(2) of the ITAA 1997 if the amount of the deposit has been deducted and the refund is not ordinary income under section 6-5 of the ITAA 1997.

The taxpayer was a partner in a partnership formed to purchase a property and to conduct a business of a retirement village aged accommodation facility on that property. The taxpayer entered into a contract with the vendor of the relevant property to acquire the relevant property in the relevant income year

Taxation Ruling TR 94/24 [now withdrawn] provided that expenditure incurred by the owner in acquiring or developing a retirement village is considered to be expenditure of a revenue nature. A deduction is allowed for that expenditure in the year in which it was incurred.

The taxpayer paid a deposit to the vendor upon signing the contract and, in accordance with Taxation Ruling TR 94/24, deducted an amount equal to the deposit in that income year pursuant to section 8-1 of the ITAA 1997.

The contract was subject to specific conditions relating to the development of the facility which were not fulfilled, giving rise to an action by the taxpayer in the relevant Court.

Independently of this, the taxpayer's partnership (together with other retirement village syndicates) was also the subject of Federal Court proceedings.

As a result of orders made by the Federal Court, the retirement village syndicate (partnership) was wound-up and the taxpayer received a full refund of the deposit.

The receipt of a refund of a deposit in the circumstances of this case can properly be regarded as an incident of the business to be stamped with the character of income and would be included in the assessable income of the business under section 6-5 of the ITAA 1997: Warner Music Australia Pty Ltd v. Federal Commissioner of Taxation (1996) 70 FCR 197; 96 ATC 5046; (1996) 30 ATR 171.

To the extent that the refund of the deposit is not included in the taxpayer's assessable income under section 6-5 of the ITAA 1997, it would be included in assessable income under subsection 20-35(1) of the ITAA 1997 where it is an assessable recoupment.

Subsection 20-20(1) of the ITAA 1997 provides that an amount is not an assessable recoupment to the extent that it is ordinary income, or it is statutory income because of a provision outside this Subdivision.

Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if - you received the amount by way of insurance or indemnity, and - you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

Indemnity is defined in The Macquarie Dictionary , 2005, rev 4th edn, The Macquarie Library Pty Ltd, NSW as including compensation for damage or loss sustained. The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) of the ITAA 1997 (paragraph 26(j) of the Income Tax Assessment Act 1936 ) has been considered in a number of cases including: Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; 5 AITR 214, Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Goldsbrough Mort & Co Ltd v FC of T (1976) 76 ATC 4343; (1976) 6 ATR 580 and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208 (1983); 14 ATR 142.

These cases make it clear that an amount received by way of indemnity is not restricted to payments received under a contract of indemnity. The cases also make it clear that an amount received by way of indemnity would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence.

The refund of the deposit received by the taxpayer upon the termination of the contract to acquire the relevant property, is compensation for the taxpayer's loss arising from paying the deposit upon entering into the contract, and thus, is an amount received by way of indemnity.

As the taxpayer has deducted an amount pursuant to section 8-1 of the ITAA 1997, for the deposit paid in the year the contract was executed, the refunded deposit is an assessable recoupment under subsection 20-20(2) of the ITAA 1997 in the year that the amount is received.