Edited version of private advice

Authorisation Number: 1052199116155

Date of advice: 02 February 2024

Ruling

Subject: CGT event F1

Question

Will the granting of a long-term lease and future transfer of the title for no consideration constitute Capital Gains Tax (CGT) event F2 under section 104-115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commenced on:

2 May 20xx

Relevant facts and circumstances

You are the Corporate Trustee of the Trust (the Trust).

The Trust entered into a contract in May 20xx to acquire the 6.9 acre property with a house located in regional part of the state.

You advised of the purchase price.

The Trustee's acquisition of the 6.9 acres settled in February 20xx.

Before settlement occurred, a utility company who supplies electricity in the metropolitan region approached you to take over a portion of land. (the Property)

A 99-year lease was executed by you and the utility company (the Company) in February 20xx, with a commencement date in February 20xx.

The lease contains a clause providing for the subdivision of the Property and transfer of the title to the utility company after subdivision at no consideration.

You advised that once subdivision of the Property takes place, the lease will be extinguished.

You advised of the amount in which was paid to you by the Company, as a lump sum (inclusive of GST) which was paid in February 20xx.

As at the time of this ruling application, you have not lodged a subdivision application for this property.

You have no further plans or intentions to subdivide the remaining parcel of land which is connected to the 1xxx square metre piece of land, known as the Property.

You have no immediate plans to sell the remaining parcel of land connected to the 1xxx square metre piece of land, known as the Property.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 160ZSA

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 section 104-110

Income Tax Assessment Act 1997 section 104-115

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

You sought advice as to whether a CGT event F2 would apply to your circumstances.

CGT event F2 happens if:

(a)  a lessor grants, renews or extends a lease over land (whether the lessor owns an estate in fee simple in the land)

(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 it to 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 in the land.

(c)   The lessor chooses to apply this event instead of CGT event F1.

Under section 103-25 of the ITAA 1997, the choice must be made by the day you [the Trust] lodged your income tax return for the income year in which the relevant CGT event happened, or within a further time allowed by the Commissioner.

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

Condition 1 - a lessor grants a lease over land

You have entered into a lease with the utility company for a term of 99 years.

Condition 2 - the lease is for at least 50 years

The term of the lease is stipulated as in excess of 50 years.

The second condition will be satisfied as the lease 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.

You have advised as part of your application process that the lease will be extinguished once the subdivision has occurred.

The following factors indicate that, at the time of the grant, it is not reasonable to expect that the lease will continue for at least 50 years:

(a) there is nothing to indicate that the Landowner, the Company and the Trust are expected to exist for at least 50 years.

(b) When the Trust transfer their interest in the Land, certain sections within the lease would cause it to be determined (or terminated) upon a disposal of the Land.

Accordingly, it is not reasonable to expect that the Company will continue to have a lease over the Land 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

When taking into consideration the conditions of the lease, the terms of the lease are substantially the same as those in which the lessor owns the land.

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

You have stated that the Company has not yet chosen to apply section 104-115, however, it will choose to apply section 104-115 prior to the income tax return lodgment. Therefore, the fifth condition would be satisfied.

Application to your circumstances

When reviewing the above conditions, as not all of the conditions have been met under section 104-115, a CGT event F1 would occur rather than the CGT event F2.

A CGT event F1 happens if a lessor grants, renews or extends a lease and the lease period would be less than 50 years.

Capital gains tax

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.

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).

You had the option to grant a lease and received a lump sum lease premium payment. CGT event F1 will occur at the time the lease contract is entered into and the lease premium will form part of the capital proceeds of the event. The capital gain or loss that occurs following CGT event F1 will be included in your assessable income in the year the event occurs.

Paragraph 115-25(3)(e) specifically states that the general discount will not apply to capital gains arising from CGT event F1. Accordingly, you can not apply the general discount when calculating any capital gain made from the CGT event.