The AAT has decided that the repayment of a deposit paid upon entering into a contract to buy a retirement village was an assessable recoupment pursuant to s 20-20 of the ITAA 1997.
Various entities formed a partnership, whose business included the acquisition, development and management of retirement village facilities. The taxpayer held an interest in the partnership through one of the entities forming the partnership. In June 1999, the partnership contracted to buy a retirement village in Victoria. A deposit of $6.5m was paid, of which the taxpayer’s share was $55,500 (which amount was allowed as a deduction). The balance of the purchase price was payable on settlement, which was conditional on the vendor completing certain works.
Two things happened In February 2006. First, proceedings brought by the partnership against the vendor of the retirement village were settled, with the vendor agreeing to repay the deposit plus interest. Secondly, in proceedings brought by ASIC, the Federal Court ordered that an unregistered managed investment scheme in relation to the retirement village in question be wound up. In due course, the partnership was repaid most of the deposit, of which the taxpayer’s share was $47,927.
The AAT firstly decided that the $47,927 was not assessable under s 6-5 as ordinary income. The amount received by the partnership (whether described as a refund of the deposit or the settlement of a litigation claim) could not be characterised as a gain or profit to the partnership’s business, the AAT said. However, the Tribunal did conclude that the payment was an assessable recoupment pursuant to s 20-20 of the ITAA 1997. This was on the basis that the payment had been received “by way of indemnity”. Crucially, the AAT decided that the term “indemnity” can apply to a loss already incurred and is not restricted to a loss that may happen in the future.
(AAT Case [2013] AATA 93, Re Batchelor and FCT, AAT, Deutsch DP, Ref No: 2012/0392, 22 February 2013.)
[LTN 37, 25/2/13]