Ronald, McDonald’s and the case of pre-paid rent

Part of the agreement for the Mussalli Family Trust - linked to one of the "fast-food power couples" of NSW, Ronald and Sandra Mussalli - to operate seven McDonald’s restaurants included provisions for upfront payments in order to secure a monthly rent reduction.

Described as pre-paid rent, the payments were worth almost $10.5 million, with the deductions claimed spread over 10 years.

The Federal Court found the trust's upfront payments were of a capital nature, agreeing with the ATO that in the case of each restaurant, the payments secured a more profitable business structure through a reduction in ongoing costs.

The Court said the non-refundable nature of the payments suggested they were not made to secure the right to occupy the premises, but were capital in nature.

In considering the implications of the ruling, Jonathan told reporter Tom McIlroy that, while “the issue of upfront lease payments wasn't new in business, the case served as a timely reminder for all tenants that describing an amount as rent doesn’t automatically make it deductible.”

“What is clear yet again from this case, is that the labels the parties choose to attach to a transaction are not determinative." he said.

This decision will clearly require McDonald’s franchisees to consider how they may have treated any upfront payments they have made under similar arrangements. However, for commercial tenants struggling with the impact of COVID-19, their very survival rests not with the rules and regulations of the pre pandemic property world, but in dialogue and negotiation of new contractual arrangements. This decision serves as timely reminder that tenants must be careful when entering into any new arrangement with landlords. While proposed incentive arrangements may seem attractive at first instance, it is of utmost importance that the parties have a clear understanding of the tax implications.

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