Private ruling: Lease payment
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997, for the 20% premium of the freehold capital value paid to a lessor of leasehold land which is currently used for income producing purposes? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: The payment is considered to be capital in nature as it is a one off payment that secures an enduring benefit. Therefore, a deduction is not allowable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 stipulates that an outgoing will qualify for deduction against assessable income to the extent it is incurred in producing assessable income or is necessarily incurred in carrying on a business for the purpose of producing assessable income. However, a deduction is denied to the extent that the outgoing is capital or of a capital nature. The test to distinguish between capital and revenue outgoings was laid down by Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5ATD 87; (1938) 1 AITR 403 ( Sun Newspapers ): Expenditure in establishing, replacing and enlarging the profit-yielding structure of the business is capital. The working or operating expenses of the business are revenue. Capital expenditure often produces an enduring benefit. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature. Taxation Ruling TR 98/15 states at paragraph 12: One off payments to secure the use of an asset for an extended period of time or to reduce subsequent payments may be of a capital nature At paragraph 49 it is stated that the deductibility of payments under a lease depends on whether the payment is of a revenue or capital nature. In particular the Commissioner has expressed the view that the nature of the payment is a question to be determined having regard to the facts and circumstances of a particular case. He further states that four factors are used to determine the true nature of a payment: · the character of the advantage sought · the manner in which it is to be used · the means adopted to obtain it and · the advantage sought by the making of the payment. In AAT Case 4201 (1988) 19 ATR 3367; 88 ATC 413 it was considered that a lease payment was of capital nature. It was held that the payment secured for the partnership an asset of an enduring nature which was the use of property for a further 91 years. A lease you currently hold on an income producing property will be terminated in a few years. In order to extend the lease on this property you are required to pay a 20% premium to the lessor on or before a particular date. In your case it is apparent that the asset obtained as a result of the payment of the 20% premium is of an enduring nature, being a lease for a further X years Y months. In this context enduring does not mean forever (refer Sun Newspapers at page 355). It is critical to note that what you got is the right to use the property for a period of X plus years. There is an enduring benefit to you as a result of entering into the agreement with the lessor in that you have the right to use and enjoy the advantage for a long period of time, although the benefit expires at the expiry of the lease period. This supports the conclusion that the benefit gained is of a capital nature. Also, the contract does not provide for the premium to be paid over a period of time; rather it only provides for the one off payment of the amount. As there was no option to pay the premium periodically over the term of the lease extension, it cannot be said that the payment of the premium is a 'prepayment' of a recurring expense. The expenditure incurred by you as a result of the payment of the 20% premium, is not a recurring expense and secures an enduring benefit. Therefore, it is regarded as capital and not revenue expenditure. Consequently, the payment is not deductible under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You purchased a leasehold interest in a property which has since been rented to a third party tenant. | The termination date on the original lease is in a few years time. | In order to extend the lease for X years and Y months, you are required to pay a premium of 20% of the freehold capital value of the property to the lessor on or before a particular date.