Private ruling: Lease surrender payment by a third party
Published: May 2014
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and Answers: | 1. Is your expenditure incurred to acquire the rights to take over an existing lease and to acquire the rights to a new lease an allowable deductible under section 8-1, section 40-880 or any other provision of the Income Tax Assessment Act 1997 (ITAA 1997)? | No. | 2. Is your expenditure incurred to acquire the rights from a tenant to take over an existing lease and to acquire the rights to obtain a new lease includes in the first element of your cost base of the lease acquired under subsection 110-25(2) of the ITAA 1997? | Yes.

Relevant facts and circumstances: You have carried on a business in rented premises for many years. The landlord advised you that the rent was to substantially increase so you looked at other business premises along the same road and found a business premises where the tenant had decided to leave. The new business premises had a larger floor space and a cheaper rent compared to the existing business premises. You and the tenant agreed that if they could convince the landlord and the estate agent (who had been appointed to secure a new tenant) that you were the right tenant to take over the existing lease and to secure you a new lease when the existing lease finished, then you would pay the tenant a sum of money. A joint bank account was opened, in which the agreed sum was deposited and would be transferred to the tenant if your lease application was successful (which it subsequently was).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 40-880 | Income Tax Assessment Act 1997 Section 110-25

Reasons for decision: Summary: Taxation Ruling TR 2005/6 is about lease surrender receipts and payments, in which paragraphs 28 to 30 state: Where a third party makes a lease surrender payment to a lessee to induce it to surrender its lease and procure the grant of a new lease to the third party, the payment is capital in nature and is not deductible under section 8-1. No deduction is available under subsection 40-880(2) to a third party who makes a lease surrender payment that is capital in nature, as paragraph 40-880(3)(d) specifically excludes any expenditure in relation to a lease. A third party who makes a lease surrender payment and thereby acquires a lease over the premises, is able to include the payment in the first element of the cost base of the lease acquired under subsection 110-25(2). The above view is consistent with Taxation Determination TD 2003/1, which provides the first element of the cost base of a CGT asset in subsection 110-25(2) of the ITAA 1997 can include money paid or property given to an entity other than the one from which the asset was acquired. In your case, the arrangement is the same as described in paragraphs 28 to 30 of TR 2005/6. It follows your expenditure will not be deductible under section 8-1, section 40-880 or any other provision of the ITAA 1997. Instead, your expenditure will form part of the first element of the cost base of the new lease acquired under subsection 110-25(2) of the ITAA 1997.