ATO ID 2004/650: CGT small business concessions: basic conditions - CGT event happening in relation to a CGT asset - granting of a lease
Date of decision: 22 June 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
If CGT event F1 (about granting a lease) in section 104-110 of the Income Tax Assessment Act 1997 (ITAA 1997) happens, does that event happen 'in relation to' the underlying asset (the premises over which the lease is granted) so satisfying paragraph 152-10(1)(a) of the ITAA 1997 (one of the basic conditions for small business relief)?

Decision
Yes. A CGT event F1 capital gain will qualify for small business CGT relief on the basis that the CGT event happens 'in relation to' the underlying premises, so satisfying paragraph 152-10(1)(a) of the ITAA 1997.

Facts
The taxpayer operates a motel which they acquired after 19 September 1985. The taxpayer grants a lease to a third party to use the premises and run the motel business as consideration for the third party paying the taxpayer a lump sum.

Reasons for decision
Summary: CGT event F1 in subsection 104-110(1) of the ITAA 1997 happens when the taxpayer grants, renews or extends a lease. A capital gain or capital loss may arise from the CGT event happening. If the basic conditions under section 152-10 of the ITAA 1997 are satisfied, the taxpayer may be eligible to reduce the capital gain resulting from the CGT event using the small business concessions. The first condition in paragraph 152-10(1)(a) of the ITAA 1997 requires that the CGT event happens in relation to a CGT asset of the taxpayer. The fourth condition in paragraph 152-10(1)(d) of the ITAA 1997 requires that the asset satisfies the active asset test. With respect to the first condition it is considered the words 'in relation to' in paragraph 152-10(1)(a) of the ITAA 1997 are wide enough to allow reference to an underlying asset such as the premises over which a lease has been granted. Therefore, if CGT event F1 happens, that event can be said to happen in relation to a CGT asset of the taxpayer, being the underlying premises over which the lease is granted, and accordingly paragraph 152-10(1)(a) of the ITAA 1997 can be satisfied.

Legislative references: Income Tax Assessment Act 1997 section 104-110 subsection 104-110(1) Division 152 section 152-10 paragraph 152-10(1)(a) paragraph 152-10(1)(d)
Related ATO interpretative decisions: ATO ID 2003/346
Subject references: Active asset Basic conditions for relief Capital gains tax CGT events F1-F5 - leases CGT small business relief