Edited version of private advice

Authorisation Number: 1052171601668

Date of advice: 25 October 2023

Ruling

Subject: Deduction for reimbursement of lease grant fee

Question

Is the payment of a lease grant fee on leasehold property immediately deductible?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commences on:

22 December 2022

Relevant facts and circumstances

You entered into a contract with Company A to purchase a lodge, a leasehold hotel on a specified date for a specified amount as a GST going concern, which settled on a specified date.

You provided as with the Sale of Business contract showing the total price you paid for the purchase of the business and the breakdown of the purchase price. It also shows the breakdown for the Lease Grant Fee.

The land for the lodge is managed by Company B, where Company A in a specified year paid a specified amount to Company B as part of a lease grant fee. You provided us with details on when the registered lease expires and the renew options.

The fees paid to Company B are non-refundable.

You agreed to reimburse Company A as specified amount for the lease grant fee as part of purchasing the lodge. This amount was paid to Company A Pty Ltd on a specified date as part of the purchase price.

You paid other fees directly to Company B to approve the transfer of the lease from Company A to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 8-5

Income Tax Assessment Act 1997 section 8-10

Income Tax Assessment Act 1997 section 25-20

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

General deductions under section 8-1

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.

Generally, costs associated with acquiring a property are not deductible. For example, conveyancing costs and stamp duty on the transfer of the property are considered capital in nature and therefore not deductible.

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).

The following guidelines for determining whether a loss or outgoing is of capital nature have been set down by the High Court in Sun Newspapers Ltd. And Associated Newspapers Ltd. V. Federal Commissioner of Taxation (1938) 5 ATD 23; 5 ATD 87; 61 CLR 337:

•         the expenditure is related to the business structure itself, that is, the establishment, replacement or enlargement of the profit yielding structure rather than the money earning process, or

•         the nature of the Advantage has lasting and enduring benefit, or

•         the payment is a 'once and for all' for the future use of the asset or advantage rather than being recurrent and ongoing.

That is, where the expenditure is incurred for the purpose of securing an enduring benefit, rather than a revenue purpose, the expenditure is capital in nature and is not deductible.

Generally, the costs relating to the purchase of a business are treated as capital expenditure and therefore are not deductible. The revenue or capital character of the assets will then be determined based on the character of the asset.

In your case, the purpose of the lease grant fee is to secure the use of the land for a specified number of years with the option to renew for an additional number of years, rather than for future payments of rent. The payment was an outgoing of a capital nature, as it secured an asset of an enduring nature. Therefore, the costs are not deductible under section 8-1 of the ITAA 1997.

Lease document expenses under section 25-20

Subsection 25-20(1) of the ITAA 1997 provides that a deduction is allowable for the costs of preparing, registering or stamping a lease of a property where the property is used solely for the purpose of producing assessable income.

Subsection 25-20(2) of the ITAA 1997 states that: If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose.

In your case, you did not incur expenditure in relation to preparing, registering or stamping of a lease document. Your expenditure was in relation to a fee to grant the lease. Therefore, the lease grant fee is not deductible under section 25-20 of the ITAA 1997.

Business related costs under section 40-880

Section 40-880 allows certain business expenditure to be deducted in equal proportions over five income years where the requirements of the provision are met. However, subsection 40-880(5) contains exceptions to the types of expenditure to which section 40-880 applies:

In particular, paragraph 40-880(5)(d) of the ITAA 1997 states:

You cannot deduct anything under this section for an amount of expenditure you incur to the extent that:

...

(d) it is in relation to a lease or other legal or equitable right

The lease grant fee was a payment made to secure the lease of the land used in your business. The Commissioner considers that the lease grant fee incurred falls under the exception in paragraph 40-880(5)(d), as it is in relation to a lease.

Therefore, a deduction is also not allowed under section 40-880 of the ITAA 1997 in relation to the lease grant fees.

Depreciating asset under section 40-30

Subsection 40-30(1) of ITAA 1997 provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

(a) land; or

(b) an item of trading stock; or

(c) an intangible asset, unless it is mentioned in subsection (2).

Subsection 40-30(2) of the ITAA 1997 states that the following intangible assets are depreciating assets if they are not trading stock:

(a)  mining, quarrying or prospecting rights;

(b)  mining, quarrying or prospecting information;

(c)   items of intellectual property;

(d)  in-house software;

(e)  IRUs;

(f)    spectrum licenses;

(g)  telecommunications site access rights.

Therefore, the lease grant fee is not a depreciating asset as it is an intangible asset and is not listed in 40-30(2) of the ITAA 1997.

CGT assets under section 108-5

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 acquisition of the lease grant fee is a CGT asset. The amount will be included in the cost base and reduced cost base when a future CGT event occurs.

Conclusion

The cost you incurred in acquiring the lease grant fee is not immediately deductible. The lease grant fee is a CGT asset and the acquisition cost incurred for the CGT asset is an outgoing of capital in nature.