ATO Interpretative Decision
ATO ID 2004/265 (Withdrawn)
Income Tax
Capital gains tax: lease surrender payment made by lesseeFOI status: may be released
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This ATO ID is withdrawn as the ATO view on this matter is now contained in Taxation Ruling TR 2005/6.This document incorporates revisions made since original publication.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can a lease surrender payment made by the lessee to terminate a lease, be included as an incidental cost that relates to the CGT event that happens to the lease, under section 110-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The lease surrender payment cannot be included as an incidental cost that relates to the CGT event under section 110-35 of the ITAA 1997.
Facts
In the 2002 year of income, the taxpayer, a sole trader, entered a three year lease for a factory from which to operate a business.
During the 2003 year of income the taxpayer made a business decision to terminate the lease. The taxpayer entered into a deed of settlement for this purpose. The deed of settlement terminated the lease. The consideration for entering into this deed by the lessee was the assignment of a number of assets.
Reasons for Decision
A lease is considered to be a CGT asset under section 108-5 of the ITAA 1997. The cost base of the lease is determined in accordance with section 110-25 of the ITAA 1997. The cost base of the lease includes the cost of acquiring the lease, such as any lease premium that a lessee has to pay to obtain the lease, as well as certain incidental costs that relate to the acquisition of the lease. There are five categories of incidental costs, set out in section 110-35 of the ITAA 1997. It is necessary for any particular cost to be able to be characterised under any of these five categories for it to qualify as an incidental cost.
The surrender of a lease causes a CGT event to occur under Division 104 of the ITAA 1997. Incidental costs that relate to a CGT event that happens to the lease may form part of the cost base of the lease, but they must be able to be characterised as incidental costs under section 110-35 ITAA 1997.
The amount paid by the taxpayer, represented by the value of the property assigned to the lessor, is not a cost of acquiring the lease. Nor can this payment be properly characterised as an incidental cost relating to the CGT event of surrendering the lease under any of the categories listed in section 110-35 of the ITAA 1997.
Date of decision: 25 November 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 110-35
section 104-25
section 108-5
section 110-25
ATO ID 2003/520
Keywords
Capital gains tax
CGT cost base
CGT events
CGT events C1-C3 - end of a CGT asset
Commercial debt
Commercial debt forgiveness
Dealings & transactions
Debt release
Disposal of assets
Disposal of depreciated property
Leasehold
Termination of leases
ISSN: 1445-2782
| Date: | Version: | |
| 25 November 2003 | Original statement | |
| You are here | 29 September 2006 | Archived |