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Edited version of private advice
Authorisation Number: 1051656370489
Date of advice: 15 April 2020
Ruling
Subject: General deductions - sub-leasehold interest
Question
Can you claim a general deduction for the purchase price you incurred in acquiring a sub-leasehold interest in a land?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 20xx
Year ending 30 June 20xx
Year ending 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
You acquired a sub-leasehold interest in a land that includes all improvements and fixtures.
This land is subject to a head lease which expires on dd/mm/yyyy.
You purchased the sub-lease from a third party (Vendor). The lease will expire on dd/mm/yyyy.
The Landlord for the sub-lease is Company A.
Under the Deed of Assignment of Sub-Lease, the Vendor, as beneficial owner, assigned its interest in the Sub-Lease and the Premises, and the benefits of the covenants by the Landlord under the sub-lease.
The property is subject to a Managed Investment Scheme with Company B.
Company B has the right to rent the apartment to the public.
The owners have the option to stay in their apartments for up to eight weeks per year subject to availability.
You are responsible for all costs including Company B's fees and charges, cleaning, utilities, maintenance, replacement of furniture.
The property has been available for rent since purchase date.
Relevant legislative provisions
Income Tax Assessment Act of 1997 section 8-1
Income Tax Assessment Act of 1997 section 8-5
Income Tax Assessment Act of 1997 section 25-25
Income Tax Assessment Act of 1997 section 40-880
Income Tax Assessment Act of 1997 section 108-5
Income Tax Assessment Act of 1997 section 104-25
Reasons for decision
Summary
The costs you incurred in acquiring a sub-leasehold interest in the land is not deductible under section 8-1 of the ITAA 1997. The sub-leasehold interest is a CGT asset and the acquisition cost incurred for that CGT asset is an outgoing of capital in nature.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.
The first negative limb of section 8-1 denies a deduction for a loss or outgoing that has been incurred where it is a loss or outgoing of capital or of a capital nature: section 8-1(2)(a).
There is no statutory criterion for determining whether a loss or outgoing is of capital or of a capital nature in ITAA 1997. The concept of "capital" is normally contrasted with that of "revenue". It is said that no deduction is allowed if a particular loss or outgoing is "on capital account" but a deduction is allowed if the loss or outgoing is "on revenue account".
The courts have identified the following factors that may be taken into consideration to determine whether a loss or outgoing is capital or revenue in nature.
· the "profit yielding structure" (the Sun Newspaper's case)
· recurrent and "once and for all" expenditure
· enduring benefit
· requirement of an "economic sense"
On the other hand, "CGT asset" is defined in section 108-5(1) of the ITAA 1997 as:
(a) any kind of property, or
(b) a legal or equitable right that is not property
To avoid doubt, ITAA 1997 section 108-5(2) states that the following are CGT assets:
(a) part of, or an interest in, property or a legal or equitable right that is not property
(b) goodwill or an interest in it
(c) an interest in an asset of a partnership, and
(d) an interest in a partnership that is not covered by paragraph (c)
The entry into a lease/sub-lease by a lessor and lessee constitutes the acquisition of an asset by both the lessor and lessee. Your rights under the Deed of Assignment of Sub-Lease are legally enforceable rights and therefore, in their totality, a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997.
The acquisition cost you incurred for the sub-leasehold interest in the land (which is a CGT asset) is considered as an outgoing of capital in nature. The amount you paid for it will not be deductible under section 8-1 of the ITAA 1997.
This amount will be included in the cost base and reduced cost base of the sub-leasehold interest when a future CGT event occurs to it such as the sale to a new owner (CGT event A1) or its expiry (CGT event C2).