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

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

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

4. 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

5. 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

6. 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

7. 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

8. 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
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9. 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

10. 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
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11. 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

12. 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.

13. 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
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14. 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

15. 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’

16. 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

17. 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

18. 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

19. 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

20. 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

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

22. 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

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