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Edited version of your written advice
Authorisation Number: 1012814729918
Ruling
Subject: Lease Incentives
Question 1
Is the whole of the lease incentive plus GST assessable income?
Answer
No.
Question 2
Is the GST amount assessable income?
Answer
No.
Question 3
Is the portion of the lease incentive that was not used to pay for the fit-out assessable income?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You negotiated to lease premises to operate your business.
You entered into an Incentive Agreement with the landlord wherein the landlord agreed to pay a fit-out contribution incentive of $XX,XXX plus GST.
The Incentive Agreement states that the fit-out works paid for using funds from the landlord will be owned by the landlord.
You presented a tax invoice to the landlord in respect of the fit-out incentive for the said sum of $XX,XXX plus GST of $X,XXX totalling $XX,XXX.
The amount you expended on the fit-out was less than the lease incentive.
The balance of the lease incentive that remained after paying for the fit-out was used to pay for various other business expenditure.
Assumptions:
None.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a taxpayer's assessable income includes income according to ordinary concepts, that is, amounts that meet the ordinary definition of income.
IT 2631 discusses the circumstances in which lease incentives would be considered to be income.
For lease incentives consisting of a free fit-out, IT 2631 states that the position will depend on whether the fit-out is owned by the tenant or landlord. Where the fit-out is owned by the landlord, the corresponding lease incentive is not considered to be assessable income.
The decisions in Selleck v. FCT (1997) 36 ATR 558; 97 ATC 4856 (Selleck) and Lees & Leech Pt Ltd v. FCT (1997) 36 ATR 127; 97 ATC 4407 (Lees & Leech) are also relevant. The taxpayers in these cases received lease incentives in the form of cash amounts as contributions to the cost of fit-outs and the entire amounts were spent on the fit-outs. In both cases, the courts held that the lease incentives were not assessable income.
In the present case, you received a lease incentive amount of $XX,XXX plus GST of $X,XXX as a contribution to the cost of a fit-out. The fit-out is owned by the landlord.
GST payable on a taxable supply is excluded from assessable income under section 17-5 of the ITAA 1997. Therefore, the GST amount of $X,XXX is not included in assessable income.
Having regard to IT 2631 and the decisions in Selleck and Lees & Leech, it is considered that the portion of the $XX,XXX lease incentive that was actually spent on the fit-out is not assessable income.
IT 2631 states that cash lease incentives are assessable income. Consequently, it is considered that the balance of the lease incentive that remained after paying for the fit-out is assessable income.
Further information
Deductions may be available in relation to the expenses paid for using the remaining balance.