Larry leased his building to Terry to conduct a hotel business. The lease requires Terry to repair any damage to the building at the end of the lease. Terry fails to repair damage to the walls of the...

Larry leased his building to Terry to conduct a hotel business. The lease requires Terry
to repair any damage to the building at the end of the lease. Terry fails to repair damage
to the walls of the premises and instead pays Larry a sum of $2,000 for the damage.
Advise Larry on the tax treatment of this payment.
Suggested Solution

Larry has received a one-off lump sum payment of $2,000 after the lease agreement has
ended. It is, therefore, likely that the amount would not exhibit the characteristics of
ordinary income under s 6-5 ITAA97. However, s 15-25 ITAA97 includes, in a lessor’s
assessable income, amounts that are received from an entity (eg a lessee) for failing to
comply with a lease obligation to repair premises that have been used by the entity for
income-producing purposes and that are not assessable as ordinary income under s 6-5.
The amount of $2,000 would therefore be assessable to Larry as statutory income under
s 15-25 ITAA97.