ATO Interpretative Decision
ATO ID 2004/419 (Withdrawn)
Income Tax
Capital gains and losses: exemptions - expiry of a lease - non-assessable non-exempt incomeFOI status: may be released
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The ATOID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a capital loss made by the lessee from the expiry, surrender, forfeiture or assignment of a lease disregarded under section 118-40 of the Income Tax Assessment Act 1997 (ITAA 1997) if the lessee used the lease to produce non-assessable non-exempt income?
Decision
Yes. A capital loss made by the lessee from the expiry, surrender, forfeiture or assignment of a lease is disregarded under section 118-40 of the ITAA 1997 if the lessee used the lease to produce non-assessable non-exempt income.
Facts
An Australian resident company (the lessee) enters into a 20 year lease for property located overseas.
The lessee uses the lease to derive non-assessable non-exempt income pursuant to section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936).
Five years into the term of the lease the lessee requests that the lease be terminated.
The lessor agrees to the termination of the lease if the lessee pays a lease surrender payment.
The lessee makes the payment and the lease is terminated.
Reasons for Decision
Under section 118-40 of the ITAA 1997, if a lessee makes a capital loss from the expiry, surrender, forfeiture or assignment of a lease that was granted for less than 99 years, the capital loss is disregarded if the lessee did not use the lease solely or mainly for the purpose of producing assessable income.
The term 'purpose of producing assessable income' is a defined term for income tax purposes under section 995-1 of the ITAA 1997. This section states that:
something is done for the
purpose of producing assessable income
if it is done:
Section 6-23 of the ITAA 1997 states that an amount of ordinary income or statutory income is 'non-assessable non-exempt income' if a provision of the ITAA 1997 or another Commonwealth law states that it is not assessable income and is not exempt income.
Subsection 6-1(5) of the ITAA 1997 states that an amount of ordinary income or statutory income can have only one status (that is, assessable income, exempt income or non-assessable non-exempt income) in the hands of a particular entity.
Accordingly, if a lease is used to produce 'non-assessable non-exempt income', it is not used for the purpose of producing assessable income and any capital loss made by the lessee from the expiry, surrender, forfeiture or assignment of the lease is disregarded under section 118-40 of the ITAA 1997.
Date of decision: 2 December 2003Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 6-1(5)
section 6-23
section 118-40
section 995-1
section 23AH Related ATO Interpretative Decisions
ATO ID 2004/420
Keywords
Capital gains and losses
Lease
Non-assessable non-exempt income
Surrender
ISSN: 1445-2782
| Date: | Version: | |
| 2 December 2003 | Original statement | |
| You are here | 12 February 2010 | Archived |