Capital Gains Tax Determination

TD 56

Capital Gains: What are the CGT consequences of a lessee incurring capital expenditure on improvements to leased property?

• Please note that the PDF version is the authorised version of this ruling.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

FOI status:

1. Where a lessee incurs expenditure of a capital nature on making improvements to leased property, the CGT consequences depend upon whether the lessee or the lessor is the owner of the improvements.

IMPROVEMENTS OWNED BY LESSEE

2. In the case where the lessee owns the improvements (see CGT Determination 46), the cost base of those improvements will include the amount of capital expenditure incurred in making the improvements. On the disposal of the improvements, the amount of any consideration received will determine whether a capital gain or loss accrues. Disposal of the improvements will usually occur on the expiry or termination of the lease and the acquiror will generally be the lessor.

3. Where inadequate consideration (and the parties are not dealing at arm's length) or no consideration is given, subsections 160ZD(2) and 160ZH(9) may apply to deem the lessee to have received and the acquiror to have paid market value for the improvements.

IMPROVEMENTS OWNED BY LESSOR

4. In the case where the lessee does not own (and has never owned) the improvements, but the capital expenditure incurred by the lessee enhances the value of the lease, paragraph 160ZH(1)(c) will allow for the expenditure incurred to be included in the cost base of the lease to the lessee.

5. On expiry or termination of the lease, a disposal of the lease occurs and the amount of consideration, if any, will determine whether a capital gain or loss accrues to the lessee (see, in particular, section 160ZV).

Commissioner of Taxation
7 May 1992

References

ATO references:
NO ATOTIA PERTH

Related Rulings/Determinations:

CGT 46, now TD46
CGT 47, now TD 47
CGT 48, now TD 48

Subject References:
Leased property
capital expenditure by lessee
improvements

Legislative References:
160ZH(1)(c)
160ZH(9)
160ZD(2)
160ZV