ATO ID 2010/157: Capital Allowances: business related costs - limitation of deduction - expenditure in relation to a lease not obtained
Date of decision: 1 September 2010
Year of income: Year ending 30 June 2010 Year ending 30 June 2011 Year ending 30 June 2012 Year ending 30 June 2013 Year ending 30 June 2014
Business line: Public Groups and International

Issue
Where a lease is not obtained, is capital expenditure incurred in trying to obtain the lease expenditure incurred 'in relation to a lease' for the purposes of paragraph 40-880(5)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Where a lease is not obtained, capital expenditure incurred in trying to obtain the lease is not expenditure incurred in relation to a lease for the purposes of paragraph 40-880(5)(d) of the ITAA 1997. There is no lease for the purposes of paragraph 40-880(5)(d) of the ITAA 1997.

Facts
The taxpayer was the lessee of land on which they carried on a business. When the lease expired the lessor decided not to renew it. Instead tenders were called. The taxpayer incurred legal expenses and consultants' fees in preparing an expression of interest and lease renewal negotiations. The taxpayer's expression of interest was unsuccessful and the land was leased to another unrelated party. The legal expenses and consultants' fees incurred by the taxpayer are capital expenditure in relation to the taxpayer's business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997.

Reasons for decision
Summary: All legislative references are to the ITAA 1997. Paragraph 40-880(5)(d) provides that you cannot deduct anything under section 40-880 for an amount of expenditure that you incur to the extent that it is in relation to a lease or other legal or equitable right. Capital expenditure is incurred 'in relation to a lease' if it brings a lease into existence or it has a sufficient and relevant connection with a lease that is in existence. As the taxpayer in this case was ultimately unsuccessful in obtaining a lease there is no lease for the purposes of paragraph 40-880(5)(d). Therefore, the capital expenditure incurred by the taxpayer in trying to obtain a lease cannot be said to be in relation to a lease for the purposes of paragraph 40-880(5)(d).

Legislative references: Income Tax Assessment Act 1997 section 40-880 paragraph 40-880(2)(a) paragraph 40-880(5)(d)
Related ATO interpretative decisions: ATO ID 2007/93 | ATO ID 2007/109 | ATO ID 2007/111 | ATO ID 2009/36 | ATO ID 2010/30
Subject references: Blackhole Expenditure Capital Allowances CoE Capital Expenditure Leasing