Income tax: capital gains: does a payment made by the vendor under a rental guarantee agreement form part of the vendor's cost base of the income producing property that was sold?

No, the payment doesn't form part of the cost base of the rental property under section 160ZH of the Income Tax Assessment Act 1936 (ITAA).

A payment under a 'rental guarantee agreement' is a payment which the vendor is obligated to make under a contract for sale covenanting a certain 'guaranteed rent' from the property. If there is a shortfall in actual rental receipts from the property, the vendor is required to pay the purchaser (now the owner of the property) the difference.

The 'rental guarantee agreement' is a separate asset from the property that was sold, pursuant to section 160A. The rights under the 'rental guarantee agreement' are a chose in action in the hands of the purchaser of the property, which may be enforceable on the occurrence of certain events stipulated in the contract. Example A agrees to sell B a commercial property for $1,000,000. As part of the contract for sale, A covenants that the minimum guaranteed rental from the property will be $100,000 per annum for a period of two years from the sale. At the end of the first year of B's ownership, B has only been able to earn $80,000 in rent from the property, and obtains payment of the shortfall of $20,000 from A. The payment does not form part of the cost base of the property that A sold to B.