ATO ID 2007/175: Capital Gains Tax: granting a long-term lease - whether the original lease term includes the term of any renewal of the lease
Date of decision: 28 August 2007
Year of income: Year ended 30 June 2007
Business line: Public Groups and International

Issue
When determining whether a lease is for at least 50 years under paragraph 104-115(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), does the original lease term include the period of any renewal of the lease?

Decision
No. Under paragraph 104-115(1)(b) of the ITAA 1997, the period of any renewal of the lease must be considered separately from the term of the original lease.

Facts
A lease over land was granted for a term of 25 years. It contained an option to renew the lease for a term of 50 years. When the original lease term ended, the lessee exercised the option.

Reasons for decision
Summary: Capital gains tax (CGT) event F2 is contained in section 104-115 of the ITAA 1997. CGT event F2 happens if a lessor grants a lease over land, or renews or extends a lease over land. Paragraph 104-115(1)(b) of the ITAA 1997 requires that the lease, renewal or extension is for at least 50 years. In determining whether the lease is for at least 50 years, the period of any renewal of the lease cannot be added to the original lease term. Each period must be considered separately. Under paragraph 104-115(1)(b) of the ITAA 1997, the original lease term must be for at least 50 years, or alternatively a renewal of the lease must be for at least 50 years. Paragraph 104-115(1)(b) considers the two situations separately, as evidenced by the use of the disjunctive 'or' before the word 'extension'. This indicates that the original lease term, and the period of renewal of the lease term, must be considered separately in determining whether CGT event F2 happens. In this case the original lease term will not cause CGT event F2 to happen, but the option to renew may cause CGT event F2 to happen. This interpretation of paragraph 104-115(1)(b) of the ITAA 1997 also accords with the position under the general law. In Gerraty v. McGavin & Anor (1914) 18 CLR 152; (1914) 20 ALR 182, Isaacs J stated of a 'lease obtained by the exercise of an option to renew' that 'clearly it is a new lease, a new demise'. His Honour reiterated this view in The Minister v. New South Wales Aerated Water and Confectionery Company Ltd (1916) 22 CLR 56; (1916) 23 ALR 10, concluding that 'a renewal is a new lease'. In Rider v. Ford [1923] 1 Ch 541 at 547, Russell J stated that the right to renew is a right to call for a fresh lease. The new lease is the result of a fresh demise. Even if all the provisions in the fresh lease were the same as in the old lease it would none the less be a fresh demise, and a fresh term with fresh covenants. In 195 Crown Street Pty Ltd v. Hoare [1969] 1 NSWR 193 at 199, Asprey JA (with whose conclusion on this point Walsh JA, at 198, and Hardie A-JA, at 207, agreed) stated that 'the exercise of an option for the renewal of a lease is a grant of a fresh lease for a new term'. In Sina Holdings Ltd v. Westpac Banking Corporation [1996] 1 NZLR 1 at 13, the New Zealand Court of Appeal stated that a renewed lease clearly was the grant of a new lease which followed expiry of the original lease... It cannot properly be described as simply an extension of the original term. Although none of these cases involved taxation issues, they provide a consistent line of authority under the general law that a lease granted under an option to renew gives rise to a new lease. The lease term granted under an option to renew can not be added to, or regarded as an extension of, the original lease term. Nothing in section 104-115 of the ITAA 1997 changes the position under the general law.

Legislative references: Income Tax Assessment Act 1997 section 104-115 paragraph 104-115(1)(b)
Case references: 195 Crown Street Pty Ltd v. Hoare [1969] 1 NSWR 193
Subject references: CGT events F1-F5 - leases Land Leasehold