VII. THE PRIMARY DISTRIBUTION OF INCOME ACCOUNT
F. Property incomes (D.4)
1. Introduction
| 7.87. | Property incomes are received by the owners of financial assets and tangible non-produced assets, mainly land and subsoil assets. Property incomes accrue when the owners of such assets put them at the disposal of other institutional units. Institutional units with funds to invest do so by lending them to other units. As a result, financial assets are created whose owners are entitled to receive property incomes in the form of interest, dividends, etc. Owners of land and subsoil assets may put them at the disposal of other units by arranging contracts or leases under which the tenants, or users of the assets, agree to pay the owners property incomes in the form of rents. The regular payments made by the lessees of subsoil assets are often described as royalties, but they are treated as rents in the System. The term "rent" is reserved in this manual for rents on land and subsoil assets, payments under operating leases being described as "rentals". | | | | |  Update available. Click here |
| 7.88. | Property income may therefore be defined as:
the income receivable by the owner of a financial asset or a tangible non-produced asset in return for providing funds to, or putting the tangible non-produced asset at the disposal of, another institutional unit.
The terms governing the payment of property incomes are usually specified in the financial instrument created when the funds are transferred from the creditor to the debtor or in the contract or lease signed when the right to exploit the land or subsoil assets is transferred from the owner to the tenant or lessee. Such arrangements are typically made only for a limited period of time, after which the funds must be repaid or the right to exploit the land or subsoil assets reverts to the owner. The period of time may be several months or several years, and such arrangements may of course be renewed. |
| 7.89. | Property incomes are classified in the following way in the System:
Interest
Distributed income of corporations
Dividends
Withdrawals from income of quasi-corporations
Reinvested earnings on direct foreign investment
Property income attributed to insurance policy holders
Rent.
Each of these items is described in more detail below. The income that the owners of quasi-corporations withdraw from them is analogous to the income withdrawn from corporations by paying out dividends to their shareholders. It is therefore treated as property income accruing to the owners of quasi-corporations. |
2. Property incomes distinguished from rentals
| 7.90. | The distinction between property incomes and the rentals receivable and payable under operating leases is fundamental to the System as rentals are treated as sales or purchases of services. The nature of operating leasing has already been described in chapter VI. In the present context, it is sufficient to emphasize the following differences between operating leasing and the renting of land and subsoil assets:
(a) Under an operating lease, the items leased consist of fixed assets such as buildings, ships, aircraft, vehicles, etc., that are all produced assets;
(b) The lessors of produced assets are typically engaged in processes of production whereby they provide services to the lessees by purchasing and maintaining inventories of fixed assets that they are able to lease out at short notice and for varying lengths of time for the convenience of their clients;
(c) The lessors engage in gross fixed capital formation in order to acquire the assets and incur consumption of fixed capital in respect of the assets they lease. |
| 7.91. | The rentals payable by lessees to lessors are therefore treated as purchases of services produced by the latter. They may be recorded under the intermediate consumption of enterprises or under the final consumption of households or government. On the other hand, the owners of funds, land or subsoil assets who merely place these assets at the disposal of other units are not considered to be themselves engaged in productive activity. The assets loaned, rented or leased have not been produced and no capital consumption is incurred in respect of their use. The property incomes payable by enterprises that borrow funds or rent land or subsoil assets do not affect the calculation of their value added or operating surpluses. |
| 7.92. | The renting of buildings, including dwellings, is not usually described as operating leasing, but the rentals paid by tenants under a building lease are treated in the same way as the rentals paid by lessees of other fixed assets. The rentals paid by tenants are treated as payments for the provision of building or housing services. Similarly, permitting other units to make use of intangible fixed assets is treated in the same way as operating leasing. Although the payments made by units using processes or producing products covered by patents are usually described as "royalties", they are treated as purchases of services produced by the owners of the patents. | | | | | Update available. Click here |
3. Interest (D.41)
Introduction
| 7.93. | Interest is a form of property income that is receivable by the owners of certain kinds of financial assets, namely:
Deposits
Securities other than shares
Loans
Other accounts receivable.
These financial assets are all claims of creditors over debtors. Creditors lend funds to debtors that lead to creation of one or other of the financial instruments listed above. The amount of the debtor's liability to the creditor at any point of time may be described as the principal outstanding. It is the amount that the debtor must repay to discharge the liability and thereby extinguish the creditor's claim over the debtor.
Interest may be defined as follows:
Under the terms of the financial instrument agreed between them interest is the amount that the debtor becomes liable to pay to the creditor over a given period of time without reducing the amount of principal outstanding.
However, the interest may not necessarily be due for payment until a later date and sometimes not until the loan, or other financial instrument matures. Interest may be a predetermined sum of money or percentage of the principal outstanding. If some or all of the interest accruing to the creditor is not paid during the period in question, it may be added to the amount of the principal outstanding or it may constitute an additional, separate liability incurred by the debtor. As explained in chapter XI, there are many different kinds of financial instruments and new instruments are continually being evolved. Interest may therefore be paid in various different ways, not always explicitly described as interest. However, streams of net settlement payments under a swap or forward rate agreement contract (possibly described as "interest" in the contract) are not considered as property income but are to be recorded as transactions in financial derivatives in the financial account (see paragraphs 11.34 to 11.43). | | | | |  This paragraph has been revised. Click here to see the original version |
The accrual basis of recording
| 7.94. | Interest is recorded on an accrual basis, i.e., interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding. The interest accruing is the amount receivable by the creditor and payable by the debtor. It may differ not only from the amount of interest actually paid during a given period but also the amount due to be paid within the period. Some financial instruments are drawn up in such a way that the debtor is obliged to make regular interest payments, period by period, as the interest accrues but in other cases there may be no such requirement. |
| 7.95. | Certain financial instruments, for example, bills and zero coupon bonds, are such that the debtor is under no obligation to make any payments to the creditor until the asset matures. In effect, no interest becomes due for payment until the end of the asset's life at which point the debtor's liability is discharged by a single payment covering both the amount of the funds originally provided by the creditor and the interest accumulated over the entire life of the asset. However, in the System, the interest accruing in each accounting period must be recorded whether or not it is actually paid or added to the principal outstanding. When it is not paid, the increase in the principal must also be recorded in the financial account as a further acquisition of that kind of financial asset by the creditor and an equal incurrence of a liability by the debtor. |
Interest on deposits, loans and accounts receivable and payable
| 7.96. | The nature of financial assets and liabilities in the form of deposits, loans and accounts receivable and payable is explained in chapter XI. In general, the interest receivable and payable on these financial assets and liabilities is determined simply by applying the relevant rate of interest to the principal outstanding at each point of time throughout the accounting period. |
Interest on securities
Interest on bills and similar instruments
| 7.97. | As explained in chapter XI, bills are short-term securities that give the holder (creditor) the unconditional right to receive a stated fixed sum on a specified date. They are issued and traded in organized markets at a discount that depends on current market short-term interest rates and the time to maturity. Most bills mature after a period ranging from one month to one year. |
| 7.98. | Let the price paid for a bill at its time of issue be L: this represents the amount of funds that the purchaser (creditor) provides to the issuer (debtor) and measures the value of the initial liability incurred by the issuer. Let the face value of the bill be F: this represents the sum paid to the holder of the bill (the creditor) when it matures. The difference, F-L, or discount on the bill, measures the interest payable over the life of the bill. |
| 7.99. | Bills are traded on money markets at values which gradually rise to reflect the interest accruing on the bills as they approach maturity. The increase in the value of a bill due to the accumulation of accrued interest does not constitute a holding gain because it is due to an increase in the principal outstanding and not a change in the price of the asset. |
Interest on bonds and debentures
| 7.100. | Bonds and debentures are long-term securities that give the holder the unconditional right to:
(a) A fixed or contractually determined variable money income in the form of coupon payments;
or
(b) A stated fixed sum on a specified date or dates when the security is redeemed;
or
(c) Both (a) and (b). Most bonds fall into this category.
The amounts of the fixed or variable money incomes or coupon payments due for payment within the accounting period are treated as interest receivable and payable by the creditoR&Debtor respectively. In addition, when a bond is issued at a discount, the difference between the face value, or redemption price, and the issue price constitutes interest that accrues over the life of the bond, in the same way as for a bill. However, as accounts are compiled for time periods that are typically much shorter than the life of the bond, the interest must be distributed over those periods. The way in which this may be done is explained below. |
Zero-coupon bonds
| 7.101. | Zero-coupon bonds are long-term securities that are similar to bills. They do not entitle their holders to any fixed or variable money income but only to receive a stated fixed sum as repayment of principal and accrued interest on a specified date or dates. When they are issued they are usually sold at a price that is substantially lower than the price at which they are redeemed on maturity. Let L equal the issue price and F the redemption price, F-L is the value of the interest receivable and payable over the life of the bond. This interest has to be distributed over the years to its maturity. One possible method is to assume interest is credited at the end of each year at an annual rate that is constant over the life of the bond, in which case the rate is given by the following expression:
where n is the number of years from the time of issue to maturity. The interest accruing during the course of year t is then given by
where t = 1 at the end of the first year. |
| 7.102. | The interest accruing each year is effectively reinvested in the bond by its holder. Thus, counterpart entries equal to the value of the accrued interest must be recorded in the financial account as the acquisition of more bond by the holder and as a further issue of more bond by the issuer or debtor. |
Other bonds, including deep-discounted bonds
| 7.103. | Most bonds pay a fixed or variable money income and may also be issued at a discount or, possibly, a premium. In such cases, the interest receivable by the holders of the bonds has two components:
(a) The amount of the money income receivable from coupon payments each period;
plus
(b) The amount of interest accruing each period attributable to the difference between the redemption price and the issue price.
The second component is calculated in the same way as for zero-coupon bonds, as described above. In the case the deep-discounted bonds, the amounts of money income payable each period are relatively small and most of the interest accruing is attributable to the difference between the redemption price and the issue price. At the other extreme, some bonds offer an income stream in perpetuity and are never redeemed. |
Index linked securities
| 7.104. | Index linked securities are financial instruments for which the amounts of the coupon payments (interest) and/or the principal outstanding are linked to a general price index, a specific price index or an exchange rate index. When the coupon payments are index linked, the full amounts of such payments are treated as interest receivable and payable, in the same way as the interest receivable and payable on any other security paying a contractually agreed variable income. When the value of the principal is index linked, the difference between the eventual redemption price and the issue price is treated as interest accruing over the life of the asset in the same way as for a security whose redemption price is fixed in advance. In practice, the change in the value of the principal outstanding between the beginning and end of a particular accounting period due to the movement in the relevant index may be treated as interest accruing in that period, in addition to any interest due for payment in that period. The interest accruing as a result of the indexation is effectively reinvested in the security and this additional investment must be recorded in the financial accounts of the holder and issuer. |
Interest rate swaps and forward rate agreements
| 7.105. | This paragraph has been deleted. | | | | | This paragraph has been revised. Click here to see the original version |
| 7.106. | This paragraph has been deleted. | | | | | This paragraph has been revised. Click here to see the original version |
Interest on financial leases
| 7.107. | Financial leases may be distinguished from other leases by the fact that all the risks and rewards of ownership are, de facto, transferred from the legal owner of the fixed asset, the lessor, to the user of the asset, the lessee. In order to capture the economic reality of such arrangements the fixed asset is treated in the System as if it were purchased by the lessee, instead of the lessor, out of funds provided by the latter. The lessor is treated as making a loan to the lessee equal to the value of the purchaser's price paid for the asset, this loan being gradually paid off in full over the period of the lease. The rental paid each period by the lessee is therefore treated as having two components: the first consists of a repayment of principal, the remainder being treated as a payment of interest. The rate of interest on the imputed loan is implicitly determined by the total amount paid in rentals over the life of the lease in relationship to the purchaser's price of the asset. It is easily calculated using standard formulas. Assuming that the rental remains constant from period to period, the share of the rental that represents interest gradually declines over the life of the lease as the principal is repaid. The initial loan by the lessee, together with the subsequent repayments of principal, are recorded in the Financial Accounts of the lessor or lessee. The interest payments are recorded under interest in their respective Primary Distribution of Income Accounts. |
Interest payable and receivable by financial intermediaries
| 7.108. | As explained in chapter VI, the amounts of interest payable to and receivable by financial intermediaries are set in order to provide a margin that is used to defray the costs of providing certain services to their customers, both depositors and borrowers, for which they do not charge explicitly. When the value of the services provided by financial intermediaries is allocated among different customers the actual payments or receipts of interest to or from financial intermediaries need to be adjusted to eliminate the margins that represent the implicit charges made by financial intermediaries. The amounts of interest paid by borrowers to financial intermediaries must be reduced by the estimated values of the charges payable, while the amounts of interest receivable by depositors must be similarly increased. The values of the charges must, of course, be treated as payments for services rendered by financial intermediaries to their customers and not as payments of interest. They are recorded as sales of services in the production accounts of financial intermediaries and as uses in the accounts of their customers. However, when the whole output of financial intermediaries is, by convention, allocated as the intermediate consumption of a nominal industry, no such adjustments to interest payments and receipts are called for, although an adjustment item is needed in the allocation of income account of financial intermediaries and of the nominal industry. |
Nominal and real interest
| 7.109. | When a debtor is able to discharge his liability to the creditor by repaying principal equal in money value to the funds borrowed the associated interest payments are described as "nominal". Such interest payments do not represent the "real" return to the creditor when, as a result of inflation, the purchasing power of the funds repaid is less than that of the funds borrowed. In situations of chronic inflation the nominal interest payments demanded by creditors typically rise in order to compensate them for the losses of purchasing power that they expect when their funds are eventually repaid. |
| 7.110. | In inflationary situations it is possible to view an actual payment of nominal interest as consisting of two elements:
(a) A payment equal to the loss of purchasing power on the monetary value of the principal during the accounting period
(b) The balance remaining that represents the real interest accruing to the creditor.
The first element may be calculated by multiplying the value of the principal by the change in some general price index. It may be regarded as a payment made by the debtor to compensate the creditor for the real holding loss on the principal outstanding. The remainder of the nominal interest payment, which could be positive or negative, constitutes real interest. |
| 7.111. | In practice, the interest recorded in the allocation of primary income account is not partitioned in this way. The interest recorded is always the amount of nominal interest receivable or payable (plus or minus the charges for services of financial intermediaries for which no explicit charges are made, when relevant). However, the information needed to calculate real interest is provided within the System as a whole as the real holding losses incurred by creditors should be recorded in the revaluation account. A further discussion of the treatment of interest under inflation is given in chapter XIX. Annex B to chapter XIX proposes a parallel treatment of interest under significant inflation. |
4. Distributed income of corporations (D.42)
Dividends (D.421)
| 7.112. | Corporations obtain funds by issuing shares in their equity which entitle the holders to shares both of distributed profits and the residual value of the assets of the corporation in the event of its liquidation. Shareholders are the collective owners of a corporation. |
| 7.113. | Dividends are a form of property income to which shareholders become entitled as a result of placing funds at the disposal of corporations. Raising equity capital through the issue of shares is an alternative way of raising funds to borrowing. In contrast to loan capital, however, equity capital does not give rise to a liability that is fixed in monetary terms and it does not entitle the holders of shares of a corporation to a fixed or predetermined income. |
| 7.114. | Just as corporations are understood in the System to cover a set of institutional units engaged in production which may be described by different names - private or public corporations, private or public companies, cooperatives, limited liability partnerships, etc. - dividends must also be understood to cover all distributions of profits by corporations to their shareholders or owners, by whatever name they are called. Dividends may occasionally take the form of an issue of shares, but issues of bonus shares which represent the capitalization of own funds in the form of reserves and undistributed profits are not included. |
Withdrawals from income of quasi-corporations (D.422)
| 7.115. | Although a quasi-corporation is treated as if it were a corporation, it cannot distribute income by paying dividends to its owner. Nevertheless, the owner, or owners, of a quasi-corporation may choose to withdraw some or all of the entrepreneurial income of the enterprise. Conceptually, the withdrawal of such income is equivalent to the distribution of corporate income through dividends and is treated as if it were a type of dividend. It needs to be identified in order to be able to distinguish the income of the quasi-corporation from that of its owner. |
| 7.116. | In order for an unincorporated enterprise to be treated as a quasi-corporation it must have a complete set of accounts of its own. It follows that any income withdrawn from a quasi-corporation should be explicitly identifiable in its accounts, where it is likely to be recorded as a payment, or transfer, to an account of the owner kept separately from the accounts relating to the activities of the quasi-corporation itself. |
| 7.117. | The amount of income which the owner of a quasi-corporation chooses to withdraw will depend largely on the size of its entrepreneurial income, i.e., its operating surplus plus property income receivable on any assets owned by the enterprise minus any interest or rents payable on its liabilities, land or other tangible non-produced assets. When deciding exactly how much to withdraw, the owner has to take into account the size of its entrepreneurial income in much the same way as the board of directors of a corporation in deciding how much to pay out in dividends. Conceptually, the income withdrawn is a form of property income accruing to the owner of a quasi-corporation in respect of funds invested in the enterprise. |
| 7.118. | Withdrawals of income from a quasi-corporation do not, of course, include withdrawals of funds realized by the sale or disposal of the quasi-corporation's assets: for example, the sale of inventories, fixed assets or land or other non-produced assets. Such sales would be recorded as disposals in the capital account of the quasi-corporation and the transfer of the resulting funds would be recorded as a withdrawal from the equity of quasi-corporations in the financial accounts of the quasi-corporation and its owner(s). Similarly, funds withdrawn by liquidating large amounts of accumulated retained savings or other reserves of the quasi-corporation, including those built up out of provisions for consumption of fixed capital, are treated as withdrawals from equity. Conversely, any funds provided by the owner(s) of a quasi-corporation for the purpose of acquiring assets or reducing its liabilities should be treated as additions to its equity. Just as there cannot be a negative distribution from the entrepreneurial income of corporations in the form of negative dividends, it is not possible to have a negative distribution from the entrepreneurial income of quasi-corporations in the form of negative withdrawals. However, if the quasi-corporation is owned by government, and if it runs a persistent operating deficit as a matter of deliberate government economic and social policy, any regular transfers of funds into the enterprise made by government to cover its losses should be treated as subsidies, as explained in paragraph 7.78 (c) above. |
5. Reinvested earnings on direct foreign investment (D.43)
| 7.119. | As explained in chapter XIV, a direct foreign investment enterprise is a corporate or unincorporated enterprise in which a foreign investor has made a direct foreign investment. A direct foreign investment enterprise may be either:
(a) The (unincorporated) branch of a non-resident corporate or unincorporated enterprise: this is treated as a quasi-corporation; or
(b) A corporation in which at least one foreign investor (which may, or may not, be another corporation) owns sufficient shares to have an effective voice in its management. |
| 7.120. | Actual distributions may be made out of the entrepreneurial income of direct foreign investment enterprises in the form of dividends or withdrawals of income from quasi-corporations. The payments made in these ways to foreign direct investors are recorded in the accounts of the SNA and in the balance of payments statistics of the IMF as international flows of property income. However, both systems also require the saving or retained earnings of a direct foreign investment enterprise to be treated as if they were distributed and remitted to foreign direct investors in proportion to their ownership of the equity of the enterprise and then reinvested by them. In other words, two additional entries are required in the accounts of the enterprises and their foreign owners, one of which is the imputed remittance of retained earnings, while the other is the imputed reinvestment of those earnings. The imputed remittance of these retained earnings is classified in the System as a form of distributed income that is separate from, and additional to, any actual payments of dividends or withdrawals of income from quasi-corporations. |
| 7.121. | The rationale behind this treatment is that, since a direct foreign investment enterprise is, by definition, subject to control, or influence, by a foreign direct investor or investors, the decision to retain some of its earnings within the enterprise must represent a conscious deliberate investment decision on the part of the foreign direct investor(s). In practice, the great majority of direct investment enterprises are subsidiaries of foreign corporations or the unincorporated branches of foreign enterprises, i.e., quasi-corporations, that are completely controlled by their parent corporations or owners. |
| 7.122. | The retained earnings in question are equal to:
the operating surplus of the direct foreign investment enterprise
plus
any property incomes or current transfers receivable
minus
any property incomes or current transfers payable, including actual
remittances to foreign direct investors and any current taxes payable
on the income, wealth, etc., of the direct foreign investment enterprise.
Thus, the retained earnings are equal to the entrepreneurial income of the foreign direct investment enterprise, plus or minus any current transfers receivable or payable, including any current taxes on income, wealth, etc. payable. If the direct enterprise is wholly owned by a single foreign direct investor (for example, a branch of a foreign enterprise) the whole of the retained earnings are deemed to be remitted to that investor and then reinvested, in which case the saving of the enterprise must be zero. When a foreign direct investor owns only part of the equity of the direct investment enterprise, the amount which is deemed to be remitted to, and reinvested by, the foreign investor is proportional to the share of the equity owned. |
6. Property income attributed to insurance policyholders (D.44)
| 7.123. | The technical reserves held by insurance enterprises consist of the actuarial reserves against outstanding risks in respect of life insurance policies, including reserves for with-profit policies which add to the value on maturity of with-profit endowments or similar policies, prepayments of premiums and reserves against outstanding claims. Although held and managed by insurance enterprises, the technical reserves are held in trust for the benefit of policyholders, or beneficiaries in the case of reserves against outstanding claims. The reserves are, therefore, considered to be assets of the policyholders or beneficiaries and liabilities of the insurance enterprises. In the financial accounts, the claims of holders of both life and non-life insurance policies over the insurance enterprises are described as the net equity of households on life insurance reserves and on pension funds and prepayments of insurance premiums and reserves for outstanding claims. |
| 7.124. | Insurance technical reserves are invested by insurance enterprises in various ways. They are commonly used to purchase financial assets, land or buildings. The insurance enterprises receive property income from the financial assets and land, and earn net operating surpluses from the renting or leasing of residential and other buildings. The total of the primary incomes received in this way from the investment of insurance technical reserves is described as investment income. It does not, of course, include any income received from the investment of insurance enterprises' own assets. However, as the technical reserves are assets of the insurance policyholders, the investment income receivable by insurance enterprises must be shown in the accounts as being paid by the insurance enterprises to the policyholders. The income payable by insurance enterprises to policyholders in this way is described as property income attributed to insurance policyholders. However, this income is retained by the insurance enterprises in practice. It is therefore treated as being paid back to the insurance enterprises in the form of premium supplements that are additional to actual premiums payable under the terms of the insurance policies. These premium supplements on non-life insurance policies and on life insurance policies taken out under social insurance schemes are recorded together with the actual premiums in the secondary distribution of income accounts of the units concerned. The premium supplements on individual life insurance policies not taken out under social insurance schemes, like the actual premiums, are not current transfers and are therefore not recorded in the secondary distribution of income accounts. They are used directly to acquire financial claims over the life insurance reserves and are included as one of the elements contributing to the change in the net equity of households on life insurance reserves and pension funds recorded in the financial accounts of the units concerned. |
| 7.125. | Receipts of income by insurance enterprises from the investment of the technical reserves are recorded in the primary distribution of income account of insurance enterprises in the normal way. Net operating surpluses earned from the activity of renting buildings are recorded in the generation of income account while property incomes receivable from investment in financial assets or land are shown in the allocation of primary income account. An amount equal to the total value of this investment income is then shown under uses in the allocation of primary income account as being payable to policyholders as property income attributed to insurance policyholders. Thus, the balance of primary incomes and the disposable incomes of insurance enterprises are not influenced by the amounts of income received from the investment of technical reserves. |
| 7.126. | The total value of the investment income of an insurance enterprise is allocated among policyholders in proportion to the actual premiums paid. The amounts receivable by individual policyholders as property income attributed to insurance policyholders are shown under resources in the allocation of primary income accounts of the institutional units and sectors concerned. |
| 7.127. | Pension funds consist of the reserves held by autonomous funds established by employers and/or employees to provide pensions for employees after retirement. The reserves, and the income received by investing the reserves in financial assets, land or buildings, are treated in the same way as technical reserves and investment income associated with life insurance taken out under a social insurance scheme. The pension funds are assets of the households entitled to receive pensions in the present or future periods and constitute liabilities of the institutional units administering the funds. The investment income receivable by the pension funds is therefore recorded as being payable by the pension funds to the entitled households in the primary income accounts of the pension funds and the households under the heading property income attributed to insurance policyholders. Households are then treated as paying an equal amount back again to the funds as premium or contribution supplements in the secondary distribution of income accounts. |
7. Rents (D.45)
Rents on land
| 7.128. | The rent received by a landowner from a tenant constitutes a form of property income. Rent is recorded on an accrual basis, i.e., rent is treated as accruing continuously to the landowner throughout the period of the contract agreed between the landowner and the tenant. The rent recorded for a particular accounting period is, therefore, equal to the value of the accumulated rent payable over that period of time, as distinct from the amount of rent due to be paid during that period or the rent actually paid. |
| 7.129. | Rent may be paid in cash or in kind. Under share-cropping or similar schemes, the value of the rent payable is not fixed in advance in monetary terms and is measured by the value at basic prices of the crops that the tenants are obliged to provide to the landowner under the contract between them. Rents on land also include the rents payable to the owners of inland waters and rivers for the right to exploit such waters for recreational or other purposes, including fishing. |
| 7.130. | A landowner may be liable to pay land taxes or incur certain maintenance expenses solely as a consequence of owning the land. By convention, such taxes or expenses are treated as payable by the tenant who is deemed to deduct them from the rent that he would otherwise be obliged to pay to the landowner. Rent reduced in this way by taxes or other expenses for which the landowner is liable is described as "net rent". By adopting the convention that the tenant pays only the net rent, the taxes or expenses are recorded in the production or generation of income accounts of the tenant. This treatment does not change the income of the tenant. The convention avoids the necessity to create a notional enterprise for the landowner if the landowner is not already engaged in some other kind of productive activity. |
| 7.131. | As already noted, the rentals payable on buildings or other structures are treated as purchases of services. In practice, however, a single payment may cover both rent and rentals when an institutional unit rents land and any buildings situated on it in a single contract, or lease, in which the two kinds of payments are not differentiated from each other. For example, a farmer may rent a farmhouse, farm buildings and farmland in a contract in which only a single payment is required to cover all three. If there is no objective basis on which to split the payment between rent on land and rental on the buildings, it is recommended to treat the whole amount as rent when the value of the land is believed to exceed the value of the buildings on it, and as a rental otherwise. |
Rents on subsoil assets
| 7.132. | The ownership of subsoil assets in the form of deposits of minerals or fossil fuels - coal, oil or natural gas - depends upon the way in which property rights are defined by law and also on international agreements in the case of deposits below international waters. In some cases the assets may be owned by the owner of the ground below which the deposits are located but in other cases they may be owned by a local or central government unit. |
| 7.133. | The owners of the assets, whether private or government units, may grant leases to other institutional units permitting them to extract such deposits over a specified period of time in return for the payment of rents. These payments are often described as royalties, but they are essentially rents that accrue to owners of the assets in return for putting them at the disposal of other institutional units for specified periods of time and are treated as such in the System. The rents may take the form of periodic payments of fixed amounts, irrespective of the rate of extraction or, more likely, they may be a function of the quantity or volume of the asset extracted. Enterprises engaged in exploration may make payments to the owners of surface land in exchange for the right to make test drillings or investigate by other means the existence and location of subsoil assets. Such payments are also to be treated as rents even though no extraction may take place. |
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