Edited version of private advice

Authorisation Number: 1052090197961

Date of advice: 21 February 2023

Ruling

Subject:CGT - lease

Question

Does CGT event F2 happen under section 104-115 of the Income Tax Assessment Act 1997 (ITAA 1997) when the Company grants a sub-lease to the Trust?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

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

The Company is developing a Project under a lease arrangement on land (the Land).

The Company is the entity carrying out the development activities of the Project.

The Company will enter into an agreement and at the commencement of construction will enter into a lease (Ground Lease) with the Landowners.

The Ground Lease will be for a term in excess of 50 years.

Once the construction phase is completed the Company will enter into a Sublease with the Trust.

The Trust will rent out the properties developed on the Land.

The term of the Sublease is in excess of 50 years.

The Sublease contains clauses that can only pertain specifically to the Landowner and the Company.

Termination of the leases can only occur for reasons of default.

Sale of the Land by the Landowners does not result in termination of the leases, as it is a requirement that a new Landlord is found.

The Company will choose to apply section 104-115 of the ITAA 1997. The choice will be made via the lodgement of an income tax return or making a choice in a separate document provided directly to the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 160ZSA

Income Tax Assessment Act 1997 section 104-110

Income Tax Assessment Act 1997 section 104-115

Reasons for Decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question

Does CGT event F2 happen under section 104-115 when the Company grants a sub-lease to the Trust?

Summary

CGT event F2 will happen when the Sublease is granted in favour of the Trust, as all the conditions at paragraph 104-115(1) will be satisfied.

Reasons for decision

CGT event F2 happens when the following conditions in paragraph 104-115(1) are satisfied:

(a)  a lessor grants a lease over land (whether or not the lessor owns an estate in fee simple in the land), or renews or extends a lease over land; and

(b)  the lease, renewal or extension, is for at least 50 years and:

(i)    at the time of the grant, renewal or extension, it was reasonable to expect that the lease would continue for at least 50 years; and

(ii)   the terms of the lease, renewal or extension as they apply to the lessee are substantially the same as those under which the lessor owned the land or held a lease of the land; and

(c)   the lessor chooses to apply section 104-115 instead of section 104-110.

Each of the conditions at paragraph 104-115(1) at will be examined in turn.

Condition 1 - a lessor grants a lease over land

The Company will enter into a lease with the Landowners for a term in excess of 50 years. Once the construction phase is completed, the Company will enter into a Sublease with the Trust for a term in excess of 50 years. Under paragraph 104-115(1)(a), it is not necessary for the lessor to own the freehold interest in the land.

The first condition will be satisfied, as the lessor (the Company) will grant a lease (the Sublease) over the land.

Condition 2 - the lease is for at least 50 years

The term of the Sublease will be stipulated as in excess of 50 years.

The second condition will be satisfied as the Sublease is for at least 50 years.

Condition 3 - at the time of the grant it was reasonable to expect that the lease would continue for at least 50 years

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No.4) 1989 (EM), which inserted section 160ZSA into the Income Tax Assessment Act 1936, the predecessor of section 104-115, provides the following comments in relation to a long term lease and the 'reasonable expectation' requirement:

...a lease will not be an eligible long term lease in circumstances where the lease is for a term of more than 50 years but includes a provision for the determination of the lease on the occurrence of an event which is likely to occur before 50 years have elapsed.

Where any of the terms of a new lease render it unlikely that the lease will continue beyond a certain date before the expiry of the term of the lease, then it would not be reasonable to expect that the new lease would continue beyond that date.

...

When determining whether it is reasonable to expect that the new lease would continue for at least 50 years, regard will be had to all of the facts that are known or ascertainable at the time when the lease was granted. These facts would include, for example, any separate arrangement, agreement or understanding, whether or not expressed in writing, that existed between the parties to the lease at the time the lease was granted.

...

Furthermore, where a new lease contains a term providing that the lease may be determined by the lessor giving notice, then ordinarily it would not be reasonable to expect that the lease would continue beyond the earliest date upon which the lease may be determined by the lessor giving such notice.

The following factors indicate that, at the time of the grant of both the Ground Lease and the Sublease, it is reasonable to expect that they will continue for at least 50 years:

(a)  there is nothing to indicate that the Landowner, the Company and the Trust are not expected to exist for at least 50 years.

(b)  if the Landowner or the Company sell or transfer their interest in the Land, none of the provisions in the Ground Lease would cause it or the Sublease to be determined (or terminated) upon a sale of the Land. Rather, a clause provides a mechanism for the Ground Lease to remain in operation in the event of a sale of the land by ensuring the new Landowner will assume the Landlord's obligations under the Lease on the same terms. Accordingly, it is reasonable to expect that the Company will continue to have a lease over the Land for at least 50 years.

(c)   if the Ground Lease is terminated for any reason, the Sublease will automatically terminate; however, the Ground Lease cannot be terminated other than under a clause relating to default of obligations under the Ground Lease. There is nothing to indicate that the events which may result in the termination of the Ground Lease, and in turn the Sublease, are events that are reasonably expected to occur within the terms of the Ground Lease or Sublease.

(d)  there is no separate arrangement, agreement, or understanding (whether express or implied) between the parties that the Sublease should run for less than 50 years.

Accordingly, the third condition will be satisfied at the time of the grant of the Sublease, as it is reasonable to expect that the Sublease will continue for at least 50 years.

Condition 4 - the terms of the lease as they apply to the lessee are substantially the same as those under which the lessor owned or leased the land

The Ground Lease is incorporated into the Sublease, except to the extent that the Ground Lease is varied as set out in the Sublease.

Having regard to the terms of the Sublease, the Ground Lease and the variations to the Ground Lease (as incorporated into the Sublease), the terms of the Sublease as they apply to the Trust are substantially the same as the terms under which the Company holds a lease of the Premises.

Accordingly, the fourth condition is satisfied.

Condition 5 - the lessor chooses to apply section 104-115 instead of section 104-110

You have stated that the Company will choose to apply section 104-115. Therefore, the fifth condition will be satisfied.

CGT event F2 conclusion

As all of the requirements in section 104-115 are satisfied, CGT event F2 will happen when the Sublease is granted in favour of the Trust.