Private ruling: end of lease income
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the amount received in relation to the income from the end of the lease be assessable as ordinary income? | A1: No. | Q2: Will the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 apply in relation to the income from the end of the lease? | A2: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own commercial premises (the premises) which are tenanted under a lease agreement. The premises were sold to a related entity of the tenant and settlement will take place with two transactions. The first transaction is a payment of $XXXX (excl GST). The second transaction has been negotiated with the purchaser that an amendment be made to the lease as part of the sale. The amendment removes the liability of the lessee with regard to the remaining term of the lease. You will issue an invoice for $XXXX (incl GST) for consideration of the lease amendment. This amount is a payout of the balance of lease obligations. Under the sale arrangement, proceeds net of GST that you will receive will be $XXXX. The lease terminates when the property is transferred. You are not in the business of granting and surrendering leases.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 104-25

Reasons for decision: Summary: Taxation Ruling TR 2005/6 is about lease surrender receipts and payments. Paragraphs 17 to 21 explain the tax consequences for a lessor who derives a lease surrender receipt. In short, a lease surrender receipt of a lessor will constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) if received in the ordinary course of carrying on a business of granting and surrendering leases. In your case, you are not in the business of granting and surrendering leases. Therefore the income will not be assessable under section 6-5 of the ITAA 1997. According to section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997), CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because it is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expired. For this purpose, a lease is taken to have expired even if it is extended or renewed. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: • being redeemed or cancelled • being released, discharged or satisfied • expiring, or • being abandoned, surrendered or forfeited. If you enter into a contract that results in the asset ending, the time of CGT event C2 is when you enter into that contract. If there is no such contract, CGT event C2 happens when the asset comes to an end. You make a capital gain from CGT event C2 if the capital proceeds from the asset ending are more than its cost base. If the capital proceeds are less than the reduced cost base of the asset, a capital loss is made. In your case, you will sell the premises which have been leased out. The lease will terminate when the property is transferred to the new owners (the current lessee). You will receive an amount which is a payout of the balance of the lease obligations. Therefore CGT event C2 will occur.