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  • CGT events involving leases

    There are a number of capital gains tax (CGT) events that apply to the lease of land.

    Grant, extend or renew a lease

    CGT event F1 happens if you grant a lease to someone, or if you extend or renew a lease that you had previously granted. In the case of a long-term lease (one that may be expected to continue for at least 50 years) you can choose to treat the grant (renewal or extension) of the lease as a part disposal of the underlying leased property.

    Example: Receiving an amount for granting a lease

    Elisabeth operated a footwear retailing business and wished to lease some shop space in a prestigious location in the Sydney CBD. There was considerable demand for shop space in the locality and competition between prospective tenants was fierce. To secure the lease of the particular shop space she wanted, Elisabeth paid Jean Paul (the owner of the shop space) a premium of $6,000 for the grant of that particular lease.

    She entered into the lease on 6 September 2016, and Jean Paul incurred stamp duty of $300 and solicitor's fees of $500 on the grant of the lease.

    Jean Paul made a capital gain of $5,200 from CGT event F1:

    Capital proceeds:

    $6,000

    Incidental costs (stamp duty and solicitor's fees):

    $800

    For Elisabeth, this transaction results in CGT event C2 (cancellation, surrender and similar endings) when the lease expires.

    End of example

    The amount of your capital gain or 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 to apply CGT event F2 (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. The CGT discount does not apply to CGT event F2.

    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
    • any premium from the grant, renewal or extension.

    There are special cost base rules that apply if you choose to apply CGT event F2.

    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
    • 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.

    See also:

    Vary a lease

    CGT event F3 happens if you are the lessor and make a payment to the 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 are the lessee and receive a payment from the lessor for agreeing to vary or waive a term of the lease.

    You can't 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 (which normally applies if you don't 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, Caitlin, 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 Caitlin is currently paying. Sam approaches Caitlin with an offer of $5,000 cash for her to agree to vary the terms of the lease so that the lease will expire in six months' time. Caitlin agrees to vary the terms.

    Sam will make a capital loss of $5,000 from CGT event F3 happening:

    Capital proceeds

    $0

    Incidental costs divided by expenditure incurred

    $5,000

    Capital loss

    $5,000

    For Caitlin this transaction results in CGT event F4 happening. The cost base of Caitlin's lease at the time of the variation was $500. She makes a capital gain of $4,500 ($5,000 – $500).

    Caitlin's capital gain:

    Capital proceeds

    $5,000

    Cost base of the lease

    $500

    Capital gain

    $4,500

     

    End of example

    You disregard any capital loss you make from the expiry, forfeiture, surrender or assignment of a lease (except one granted for 99 years or more) if you did not use it solely or mainly for the purpose of producing assessable income – for example, if you used it for private purposes.

    CGT event F5 happens if you as lessor receive a payment for changing a lease.

    The amount of your capital gain or loss from CGT event F5 is the difference between what you receive for changing the lease and any expenditure you incurred on it. The CGT discount does not apply to CGT event F5.

    See also:

    Last modified: 29 Jun 2018QC 52198