Edited version of private advice

Authorisation Number: 1051760230843

Date of advice: 1 October 2020

Ruling

Subject: Capital gains tax

Question 1

Has CGT event A1 occurred when you enter a Heads of Terms for the assignment of the all lease payments from Telstra up to the closing date as per section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the compensation payment you will receive for the assignment of the all lease payments from Telstra up to the closing datereceived disregarded from CGT as per section 118-1 of the ITAA 1997?

Answer

No.

Question 3

Can you claim the CGT 50% discount on the compensation payment you will receive as per section 115-25 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You own a property (the property) as joint tenants.

There is a Telstra tower on the property.

You have a lease with Telstra for use the property for the tower.

The lease was entered between the joint tenants (lessors) and to Telstra (lessee) on XXXX and accepted by the lessee on the XXXX.

The term of the lease is from XXXX to XXXX.

The lessee pays the lessors an annual rental.

You still own the land that is used for the tower.

You have been offered a lump sum compensation payment from a third party via Heads of Terms for the entitlement to receive all lease payments from the lessee for a period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 section104-10

Income Tax Assessment Act 1997 section104-110

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section116-20

Income Tax Assessment Act 1997 section118-1

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Under section 6-10 of the ITAA 1997 assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included as assessable income by provisions of the tax law.

Capital gains tax (CGT)

CGT event F1 in subsection 104-110(1) of the ITAA 1997 happens when a taxpayer grants, renews or extends a lease. A capital gain or capital loss may arise from the CGT event happening. Paragraph 115-25(3)(e) specifically states that the general discount will not apply to capital gains arising from CGT event F1.

The lessor makes a capital gain if the capital proceeds from the grant, renewal or extension are more than the expenditure it incurred on the grant, renewal or extension; conversely a capital loss occurs if the capital proceeds are less (subsection 104-110(3) of the ITAA 1997).

The capital proceeds are any premium paid or payable for the grant of the lease (sub-section 116-20(2) of the ITAA 1997). Expenditure incurred on the grant of the lease does not include any part of the cost of the underlying asset.

CGT event F1 occurs at the time the contract for the lease is entered into, or if there is no contract, at the start of the lease (subsection 104-110(2) of the ITAA 1997).

In your case, you have not granted a new lease to the third party. You will enter a Heads of Terms with the third party for the third party to obtain your rights to receive all lease payments from the lessee for a period in exchange for a lump sum compensation payment from the third party.

Therefore, it is considered that you will dispose of your right to receive lease payments from the lessee. Consequently, CGT event A1 has occurred.

The capital gain that occurs following CGT event A1 will be included in your assessable income in the year the event occurs.

Exemption from CGT

Division 118 of the ITAA 1997 sets out various exemptions for multiple capital gains and losses for assets a taxpayer has acquired since CGT started on 20 September 1985.

Section 118-37 addresses where a capital gain or loss from the receipt of a compensation payment is disregarded.

In your case, you will dispose of your right to receive all lease payments from the lessee for a period in exchange for a lump sum compensation payment from the third party.

Unfortunately, none of the exemptions within section 118-37 apply to your circumstances.

Accordingly, an exemption is not available to disregard the capital gain made on the receipt of the lump sum compensation payment from the third party.

50% capital gain discount

The capital gain arising from 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 should be taken to have been acquired on or around the time the you signed the lease documents from the lessee and the subsequent negotiations between the parties commenced.

The lease was entered between the lessors and lessee on XXXX and accepted by the lessee on the XXXX.

The right to receive lease payments from the lessee was held for more than 12 months.

Accordingly, any capital gain arising from CGT event A1 is a discount capital gain and eligible for the 50% discount.