INCOME TAX: INCOME FROM

PROPERTY

1
Introduction
• Recall the “tree” and “fruit” analogy: income (being the fruit)
flows from capital (being the tree).
• In the context of income from property:

“Tree” • For example, share investment

• Gains usually capital in but can
represents: be ordinary income (eg, business
capital income) depending on taxpayer.

“Fruit” • For example, dividend income

• Known as “property income”.
represents:
income • Gains subject to ordinary income,
or a specific statutory provision.
Introduction:
Main areas of property income
• The main forms of property income in this topic are as follows:

Income
from
property

Rent and
Interest Dividends lease Royalties Annuities
income
Interest
• Interest is the return that flows from the lending of money and
is the compensation for the loss of use of that money.
– Capital sum lent is not affected by the payment of interest.
– See, Riches v Westminster Bank Ltd (1947).
• Constitutes ordinary income: s 6-5.
Dividends
• The definition of a “dividend” includes (s 6(1) ITAA36):
– Any distribution in the form of money or property that a
company makes to its shareholders.
– Any amount credited by the company to any of its
shareholders as shareholders.

Dividend assessed as
Company Shareholder statutory income:
s 44 ITAA36

Dividend
• A resident shareholder may be subject to the dividend
imputation system: see later in Unit
– Shareholder receives a “credit” for the amount of tax paid by the company
on the profits out of which the dividend is paid.
Dividends
• Companies as separate legal entities pay tax on their profits.
• On distribution of profits to shareholders (as dividends), tax that
has been paid may be “attached” (franking credit) to the
dividend, which is then called a “franked dividend”.
Shareholders who receive a franked dividend:
– Are required to “gross-up” their dividend by the attached
franking credit (s 207-20 of the ITAA 1997) (ie the franking
credit is also included in assessable income in addition to the
dividend itself); and
– Receive a tax offset equal to the franking amount (s 207-20).
• Tax offsets for franked dividends are refundable offsets for
individual taxpayers (s 67-25). See later in unit.
Dividends
Illustration: operation of imputation system
Company level $
Taxable income 100
Less: income tax payable (30%) 30
= Net profit available for distribution 70
Shareholder level
Dividend 70
Gross up by franking amount 30
= Taxable income 100
Shareholder’s tax payable
Tax on taxable income (assume 47% rate) 47
Less: tax offset equal to franking amount (30)
Income tax payable 17
Rental and lease income:
Rent
• Rent is a payment by one party in exchange for the exclusive
possession of the other party’s property for an agreed amount
of time.
• Receipt of rent constitutes ordinary income as, under the flow
concept, the rent flows from an investment in property
– If received as a lump sum, still constitutes ordinary income.
Rental and lease income:
Lease premiums
• A lease premium is a payment made by a tenant to a landlord
as inducement to enter into a lease agreement.
• Generally a capital receipt subject to the CGT provisions:
– It is regarded as a receipt for realising an interest in the
asset itself.
– Exceptions: characterised as ordinary income where:

• The taxpayer is in the business of

receiving lease premiums: Kosciusko
1 Thredbo Pty Ltd v FCT (1983).

• The lease premium is in reality a

substitute for rent: Dickenson v FCT
2 (1958).
Rental and lease income:
Not fulfilling lease obligations to repair
• Section 15-25 states that amounts received by a lessor from
the lessee due to failing to comply with a lease obligation to
repair the premises is assessable income, provided:
– The lessee has used the premises for producing assessable
income; and
– The payment is not ordinary income.
Royalties
• A royalty payment is a payment that is calculated based on the
usage of intellectual property or quantity/value of a substance
taken: McCauley v FCT (1944).
• Examples:
– Taxpayer is paid for use of intellectual property, eg a publisher
agreeing to pay an author of a book a specified amount per
book sold.
– Taxpayer is paid for physical resources (eg, oil) based on
quantity of resources taken (eg, barrel of oil).
• Royalties can be ordinary income: if meet the prerequisites and
characteristics.
• Where a royalty is not ordinary income, section 15-20 ITAA97
deems royalties to be assessable as statutory income – given
potential breadth of circumstances were a royalty will be OI –
unclear when a royalty will be a capital royalty under s 15-20
(needs consideration as a fallback provision).
 Annuities
• An annuity is a stream of payments that occurs at regular intervals (eg,
monthly or quarterly pension).
• Each payment is the product of initial capital investment and returns
generated – have a return of capital component and an income
component.

• ‘Types of annuities:

Fixed-term Life
Payments made for Payments made for
a pre-determined the rest of the
amount of time recipient’s life

• Full amount of the regular annuity payments is treated as ordinary income:

Egerton-Warburton v DCT (1934).
• Unfair as payments over life of the annuity are not fully of an income
character.
– Certain annuities are subject to s 27H ITAA36 which makes the
annuity’s return of capital component tax free.