There are a number of CGT events that might apply in relation to the lease of land.
Example - Receiving an amount for granting a lease
Elisabeth operates a profitable footwear retailing business, and wishes to lease some shop space in a prestigious location in the Sydney CBD. However, the demand for shop space in the locality is great, and competition between prospective tenants is fierce. In order to ensure that she secures the lease of the particular shop space that she wants, Elisabeth pays John Rich (the owner of the shop space) a premium of $6,000 in consideration for the grant of that particular lease.
The lease is entered into on 6 September 2003, and John Rich incurs stamp duty of $300 and solicitors fees of $500 on the grant of the lease.
John makes a capital gain of $5,200 from CGT event F1
(that is, stamp duty of $300
and solicitors fees of $500)
Note: For Elisabeth, this transaction results in CGT event C2 when the lease expires.
The amount of your capital gain or capital loss from CGT event F1 is the difference between any premium you got for granting the lease and the expenditure you incurred in granting it. The CGT discount does not apply to CGT event F1. The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event F1 happens.
You can choose for CGT event F2 to apply (rather than CGT event F1) when you grant, renew or extend a long-term lease. It can apply if you are the owner of the underlying land or if you grant a sub-lease.
Your capital proceeds if CGT event F2 happens are the greatest of:
- the market value of the freehold or head lease (at the time you grant, renew or extend the lease)
- the market value if you had not granted, renewed or extended the lease, and
- any premium from the grant, renewal or extension.
There are special cost base rules that apply if you choose for CGT event F2 to apply.
For any later CGT event that happens to the land or the lessor's lease of it, its cost base and reduced cost base (including the cost base and reduced cost base of any building, part of a building, structure or improvement that is treated as a separate CGT asset) excludes:
- any expenditure incurred before CGT event F2 happens, and
- the cost of any depreciating asset for which the lessor has deducted or can deduct an amount for its decline in value.
The fourth element of the property's cost base and reduced cost base includes any payment by the lessor to the lessee to vary or waive a term of the lease or for the forfeiture or surrender of the lease, reduced by the amount of any input tax credit to which the lessor is entitled for the variation or waiver.
CGT event F3 happens if you make a payment to a lessee to vary a lease. You can only make a capital loss from this CGT event. Your capital loss is equal to the expenditure you incurred to change the lease.
CGT event F4 happens if you (as lessee) receive a payment from the lessor for agreeing to vary or waive a term of the lease.
You cannot make a capital loss from this CGT event. You will only make a capital gain from CGT event F4 if the amount of the payment you received exceeds the cost base of your lease at the time when the term is varied. In other cases, you will be required to adjust the cost base of your lease.
The market value substitution rule for capital proceeds that applies if you do not receive market value for a CGT event does not apply if CGT event F4 happens.
Example - Payment to lessee for change in lease
Sam is the lessor of a commercial property. His tenant, Peter, currently holds a three-year lease over the property, which has another 26 months to run. A business associate of Sam's wishes to lease the property from Sam for a 10-year period, beginning in six months' time, for twice the rent that Peter is currently paying. Sam approaches Peter with an offer of $5,000 cash for Peter to agree to vary the terms of the lease so that the lease will expire in six months' time. Peter agrees to vary the terms on 10 August 2003.
Sam will make a capital loss of $5,000 from CGT event F3 happening:
Incidental costs/expenditure incurred:
For Peter this transaction results in CGT event F4 happening. The cost base of Peter's lease at the time of the variation was $500. He makes a capital gain of $4,500 ($5,000 - $500).
CGT event F5 happens if you as lessor receive a payment for changing a lease.
The amount of your capital gain or capital loss from CGT event F5 is the difference between what you receive for changing the lease and any expenditure you incurred in relation to it. The CGT discount does not apply to CGT event F5.
End of example