Edited version of private advice

Authorisation Number: 1052256727643

Date of advice: 30 May 2024

Ruling

Subject: CGT - telecommunications lease

Question 1

Has a CGT Event A1 occurred on the assignment of all future lease payments on a telecommunication tower located on your land to a third party under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you eligible to apply the 50% discount to the lump sum payment received under section 115-25 of the ITAA 1997?

Answer

No.

Question 3

Is the lump sum payment received from Company C assessable under 6-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B (you) are the registered owners of Property A. You own this as Joint Tenants.

You provided the calendar year that you purchased the land.

A section of the land has 2 separate telecommunication towers with 2 separate long-term leases with Company A and Company B.

Company A and Company B paid you an annual fee for the lease rental. The income you received was reported on your partnership return.

You provided the dates that you entered into the lease agreements with Company A and Company B.

You remain owners of the land that the towers are on.

You are not registered for GST and have not been required to be registered for GST.

You entered into a prepayment agreement with a third entity, Company C. You provided the date you entered the agreement.

Under the prepayment agreement you will receive a prepaid rent lump sum amount of a specified value.

The lump sum is a genuine prepayment of rent that the lessee would have otherwise owed.

The prepaid rent is calculated as the sum of the present value of each periodic future rental payment expected to be collected during the combined term of the lease.

You entered into a telecommunications concurrent lease with Company C where they have obtained rights to receive all future lease payments from the lessee in exchange for a specified lump sum value as outlined in the prepayment agreement.

Company C is entitled to a recompense of any unamortised portion of prepaid rent from the lessor if the lease is terminated, in respect to the portion of prepaid rent that relates to the period after termination.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-110

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 section 115-25

Reasons for decision

Question 1

Has a CGT Event A1 occurred on the assignment of all future lease payments on a telecommunication tower located on your land to a third party under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Commissioner considers that the assignment of your contractual rights to Company C to collect rent from Company A and Company B is a disposal of a CGT asset, and therefore a CGT event A1 has occurred under section 104-10 of the ITAA 1997.

Detailed reasoning

Assignment of Owner Rights

Section 108-5(1) outlines that a CGT asset is any kind of property or a legal or equitable right that is not property. Contractual rights under a lease or other agreement are legally enforceable rights, and therefore a CGT asset.

An assignment by an owner of their owner rights to another, gives rise to CGT event A1 under section 104-10 of the ITAA 1997. A capital gain from this CGT event may be made if the capital proceeds from the disposal of the asset are more than the asset's cost base or, alternatively, a capital loss from this CGT event may be made if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4)).

Generally, where no capital proceeds are received from a CGT event the market value substitution rule in subsection 116-30(1) will apply to include the market value of the CGT asset that is the subject of the event (as at the time of the event) as the amount received.

Paragraph 27 of Taxation Ruling TR 2005/6 Income tax: lease surrender receipts and payments refers to the market value of the discharging of a lease where no capital proceeds are received:

As no capital proceeds are received for the discharge, the lessor may make a capital loss to the extent to which the reduced cost base of the rights asset (which could include incidental costs and any non-deductible incentive paid to the lessee on the grant of the lease) exceeds its market value, if any (section 116-30), however it is unlikely that the market value would be other than a negligible amount."

Application to your circumstances

The disposal of owner rights to receive rent from the lessees Company A and Company B gives rise to a CGT event A1. However, as there was no premium (capital proceed) for entering the concurrent lease with Company C, the market value substitution rule needs to be applied.

On the basis that your owner rights have a market value of negligible amount, your capital proceeds are nil and you did not make a capital gain from the CGT event A1 under subsection 104-10 of the ITAA 1997.

Question 2

Are you eligible to apply the 50% discount to the lump sum payment received under section 115-25 of the ITAA 1997?

Summary

The lump sum payment is considered prepaid rent and is not a premium for entering the concurrent lease. Therefore, the 50% CGT discount is not applicable, as there is no capital proceed for the discount to be applied to under section 115-25 of the ITAA 1997.

Detailed Reasoning

The capital gain arising from a CGT event A1 is a discount capital gain and would be eligible for the 50% discount pursuant to section 115-25 of the ITAA 1997 when the capital gain resulted from a CGT event happening to a CGT asset that was acquired at least 12 months before the CGT event.

The right to receive lease payments from the lessee is taken to have been acquired when you signed the lease documents from the lessee.

Application to your circumstances

You provided the dates that you entered the leases with Company A and Company B. Your contractual right to receive lease payments was held for more than 12 months.

The lump sum amount received is prepaid rent and is substitute for the rental income stream you would have received and is not a capital proceed.

Therefore, as there was no capital gain, the lump sum will not be subject to the CGT 50% discount under 115-25 of the ITAA 1997.

Question 3

Is the lump sum payment received from Company C assessable under 6-5 of the ITAA 1997?

Summary

The lump sum received from Company C is assessable income under 6-5 of the ITAA 1997 and should be apportioned over the term of the lease.

Reasoning

Section 6-5 of the ITAA 1997 states that assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer.

If the purpose of a lump sum is to provide a substitute for an income stream, then that lump sum may take on the character of those payments it is intended to replace. Rental income is regarded as ordinary assessable income.

Pursuant to subsection 6-5(2), ordinary income is included in the assessable income of an owner when it is derived by that owner. Income is taken to be derived when it has 'come home' to the owner; that is to say it has been earned and, depending on the nature of the source of the income, there is sufficient certainty as to its being realised (Commissioner of taxes (Sa) v Executor Trustee and Agency Company of South Australia Limited [1938] HCA (Carden's Case)).

The time at which an amount represents 'income derived' by an owner depends on the nature of the income and the circumstances in which it is derived. Further, the accounting method to be used in determining when income is derived depends on its 'actual appropriateness' and, in particular, on 'whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income' (Carden's case).

The appropriate accounting method to be used to account for a prepayment of rent as ordinary income has been considered by the Taxation Board of Review. In Case B47 70 ATC 236, the Taxation Board of Review, by majority, found that the prepaid rent under the lease in question, which provided for the repayment by the lessor to the lessee of any unexpired proportion of rent calculated at a weekly rate where the lease was terminated other than in the case of the lessee's default or breach, did not come home to the lessor when received by them so as to constitute income derived at the time of receipt, and should be apportioned over the term of the lease.

That decision was distinguishable from that held by the Taxation Board of Review in Case B51 70 ATC 253 where the lessor, having received the rent in advance per the terms of the lease agreement in question, was under no obligation to refund any part of it. In this case, the Taxation Board of Review concluded that there was no ground for a view that the lessor did not derive the whole of the rent when it was paid to them.

Application to your circumstances

You entered a concurrent lease with XXXX Company C. A lump sum amount was offered as a genuine prepayment of rent that Company A and Company B would have otherwise owed to you. The amount was calculated as the sum of the present value of each periodic future rental payment expected to be collect during the combined term of the lease.

The agreement also outlines that the lessee is entitled to recompense of any unamortised portion of the prepaid rent from you in respect of the portion of the prepaid rent that related to the period after the date of termination. Your circumstances can be likened to that in case B47 70 ATC 236 where the income derived does not 'come home' to you when received to constitute income derived at time of receipt, rather it should be apportioned over the term of the lease.

Consequently, the lump sum payment you received from Company C is considered a prepayment of rental income, and is assessable under 6-5 of the ITAA 1997, and should be apportioned over the term of the lease.