Income from Property Lecturer: Arvin Ajay Sami LAW601 – Taxation Law Income from Property Lecturer: Arvin Ajay Sami 8/02/2018

Overview Income (s.11, ITA Cap 201) Types of income from property Interest Annuities Rent Royalties Dividends 8/02/2018

Income Income from property includes: Rent Interest, Royalties Dividends Annuities

Income (cont’d) There is no neat conceptual account of what is income from property The category includes income derived from exploitation of property, but it is often thought of as extending to any income that arises without personal endeavour, what is sometimes called unearned revenue Income from property arises directly in consequence of the ownership of property, unlike an employee who earns income in consequence of his labour, or business profit that is earned by the production and supply of goods and services

Income (cont’d) Common feature among the forms of property income can be stated in an alternative fashion Rent, interest, etc. can be seen as a reward for the supply of capital e.g. a party with surplus land can permit another with a shortage to use the land in return for the reward known as rent, or a party with surplus cash or other form of wealth can supply this to another for the other to use in return for interest or dividends

Income (cont’d) The general proposition, income from property is unearned revenue, or, income from property is a reward for the provision of capital, do not neatly fit or describe every instance. But, they are useful in capturing in some general sense the commonality among the different forms of property income and their distinctiveness as a group from income arising from employment or a business

Interest One and the same form of receipt may be income from property or income of a business Eg. Interest derived by an investor is income from property while interest derived by a money lender or bank is income of a business

Annuities Is historically a variant of the rent charge An annuity is an entitlement to any annual (hence the name) or periodic sum Unlike a rent charge it is not secured against a particular asset What we call today a pension is conceptually an annuity S.11(i) - annuities 8/02/2018

Annuities (cont’d) Annuity may arise by way of gift, purchase or as in the case of some pensions, by virtue of statutory provision Gift – a donor will normally establish during life, or alternatively on death by way of will, a trust providing for the payment of an annuity to the trust beneficiary Eg. A testator’s provision that following payment of creditors, assets are to be held on trust, to pay a stated annual sum to his wife during her life, with assets on her death to be distributed in equal shares amongst the children. Here the wife has life annuity

Annuities (cont’d) An annuity is a classic example of income Annuity may be defined as an entitlement to an income stream Annuities are income according to ordinary usage S.11(i) and later part of opening paragraph of s.11 expressly include annuity payments in total income 8/02/2018

Annuity or instalment of capital For tax purposes, annuities present a singular practical problem; their correct identification An annuity involves a series of periodic payments However, not every instance of periodic payment is an annuity Eg. A vendor could dispose of his capital asset and receive payment of the purchase price by installment – a series of capital receipts On the other hand, a capital receipt could be disposed of in return of an annuity

Annuity or instalment of capital (cont’d) The disposition of a capital asset in exchange for an annuity serves the double purpose of converting the capital asset into money, which would otherwise be capital into income. Roulatt J. in Jones v Comrs IR …the capital ceases to exist having being converted into an annuity.

Annuities under a trust Character of periodic payments to beneficiary of a trust as being an annuity or periodic payments of capital is determined by terms and intentions of the trust Cunard’s Trustees v IR Comrs….Annuity granted under a trust and charged on both corpus and income of the trust will always be income in the hands of beneficiary A beneficiary entitled to the capital of a trust is in receipt of capital 8/02/2018

Income from land S.11(b), paragraph (b) is the first of the paragraphs to s.11 concerned with income S.11(b) is concerned with income from land Law groups property into two general categories; real property and personal property Personal property may be further divided into chattels and choses in action Real property includes land or any interest in land Chattel includes tangible thing other than land, eg. Car, laptop, pen, etc. Choses in action include intangible property that cannot be physically possessed, eg. debt, share, copyright, payment 8/02/2018

Income from land (cont’d) For legal purposes, the term land refers to a three dimensional space that includes the space above and below the land’s surface Any permanent fixture is regarded as part of the land Legally, one does not buy a house, one buys land House attached to the earth is part of land ‘Owner of land’, does not own land itself rather owns ‘interest in land’

Income from land – Rent Income from land takes two basic forms; Rent – s.11(b) Royalties – s.11(d) Rent refers to payment that become due from a tenant to a landlord under a lease of land Rent is payment for tenants use of land Sometimes paid periodically throughout term of lease or single lump sum at commencement of lease

Income from land (cont’d) s.11(b) brings into total income any ‘… fine, premium or like consideration….’ ‘like consideration’ include a payment for or in respect of the goodwill of any business or the benefit or any statutory licence or privilege Goodwill of business must be attached to the land, must arise in large part from the location of the business

Income from land (cont’d) s.11(d) – royalties from land A royalty is a payment made to an owner of land for the removal of natural resources from the land (eg. mineral, gravel, sand, timber) Amount of payment determined by reference to quantity of mineral resources removed Royalty could be paid periodically or in advance Royalty is an income receipt

Income from copyrights and payments Copyrights and patents are intellectual property rights Copyright is the ownership right that arises in the creator of an original literary, dramatic, musical or artistic work Patent involves a grant of a monopoly right from the state in respect of an invention

Income from know-how Expression know-how refers to the knowledge, skills, processes, trade secrets, technical data, systems and such similar expertise concerning a business or industry Know how could include inventions that have not been patented, or ideas, techniques and processes that cannot be patented Can be tangible (eg. drawing) or intangible (knowledge) Valuable asset of business but little is represented in balance sheet

Income from know-how S.11(u) – know-how payments is included in total income S.2 – defined know-how payments

Dividends s.11(f) – paragraph concerns income from property in the form of dividends Tax treatment of dividend income is complex Dividend is a payment by a company to its members from the profits of a company; a distribution of profits to members

Summary Income from property includes familiar forms of income such as: Interest Rent Dividends Royalties Annuities