Private ruling: Income tax: Capital gains tax - CGT events C2 - end of a CGT asset and F1 to F5 - leases
Date of advice: 4 November 2015
Published: January 2016
Ruling period: Income year ending 30 June 2016 | Income year ending 30 June 2017 | Income year ending 30 June 2018 | Income year ending 30 June 2019
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: In relation to Site Lease 1, will undertaking the Registration Steps and the registration itself constitute CGT event C2 for Entity 4, as set out in section 104-25 of the Income Tax Assessment Act 1997? | A1: No. | Q2: In relation to Site Lease 2, will undertaking the Registration Steps and the registration itself constitute CGT event C2 for Entity 5, as set out in section 104-25 of the Income Tax Assessment Act 1997? | A2: No. | Q3: In relation to the Subleases, will undertaking the Registration Steps and the registration itself constitute CGT event C2 for Entity 3, as set out in section 104-25 of the Income Tax Assessment Act 1997? | A3: No. | Q4: In relation to Site Lease 1, will undertaking the Registration Steps and the registration itself constitute CGT event F1 for Entity 3, as set out in section 104-110 of the Income Tax Assessment Act 1997? | A4: No. | Q5: In relation to Site Lease 2, will undertaking the Registration Steps and the registration itself constitute CGT event F1 for Entity 3, as set out in section 104-110 of the Income Tax Assessment Act 1997? | A5: No. | Q6: In relation to the Subleases, will undertaking the Registration Steps and the registration itself constitute CGT event F1 for Entity 1 or Entity 2, as set out in section 104-110 of the Income Tax Assessment Act 1997? | A6: No. | Q7: In relation to Site Lease 1, will undertaking the Registration Steps and the registration itself constitute CGT event F3 for Entity 3, as set out in section 104-120 of the Income Tax Assessment Act 1997? | A7: No. | Q8: In relation to Site Lease 2, will undertaking the Registration Steps and the registration itself constitute CGT event F3 for Entity 3, as set out in section 104-120 of the Income Tax Assessment Act 1997? | A8: No. | Q9: In relation to the Subleases, will undertaking the Registration Steps and the registration itself constitute CGT event F3 for Entity 1 and Entity 2, as set out in section 104-120 of the Income Tax Assessment Act 1997? | A9: No. | Q10: In relation to Site Lease 1, will undertaking the Registration Steps and the registration itself constitute CGT event F4 for Entity 4, as set out in section 104-125 of the Income Tax Assessment Act 1997? | A10: No. | Q11: In relation to Site Lease 2, will undertaking the Registration Steps and the registration itself constitute CGT event F4 for Entity 5, as set out in section 104-125 of the Income Tax Assessment Act 1997? | A11: No. | Q12: In relation to the Subleases, will undertaking the Registration Steps and the registration itself constitute CGT event F4 for Entity 3, as set out in section 104-125 of the Income Tax Assessment Act 1997? | A12: No. | Q13: In relation to Site Lease 1, will undertaking the Registration Steps and the registration itself constitute CGT event F5 for Entity 3, as set out in section 104-130 of the Income Tax Assessment Act 1997? | A13: No. | Q14: In relation to Site Lease 2, will undertaking the Registration Steps and the registration itself constitute CGT event F5 for Entity 3, as set out in section 104-130 of the Income Tax Assessment Act 1997? | A14: No. | Q15: In relation to the Subleases, will undertaking the Registration Steps and the registration itself constitute CGT event F5 for Entity 1 or Entity 2, as set out in section 104-130 of the Income Tax Assessment Act 1997? | A15: No.

Relevant facts and circumstances: 1. Entity 1 is the head company of a consolidated group formed under Part 3-90 of the Income Tax Assessment Act 1997 , and of which Entity 2 is a subsidiary member. 2. Entity 2 entered into a lease (as lessee) in respect of land ( the Head Lease ). 3. Entity 3 was incorporated as a nominee to undertake commercial rental property investment and to obtain finance and engage builders to undertake construction and improvement works in respect of the land under the Head Lease for the purpose of those investment activities. 4. Entity 3 was established in order to separate the commercial risks of other commercial rental property investment activities from Entity 2's lease asset. Most of the building construction and improvement works undertaken have been undertaken by Entity 3. 5. Between 20XX and 20YY Entity 2 granted a number of unregistered subleases ( the Subleases ) to Entity 3 over an area of land within the area covered by the Head Lease. All of the Subleases are substantially the same in nature and form. The only material differences are with respect to: • Parcels of land covered (all of which are covered by the Head Lease) • Duration of the lease term • Consideration payable, and • Obligations to remove any improvements on termination of the sublease if required by Entity 2, or for ownership of improvements to vest in Entity 2 at end of term. 6. The Subleases include: • Sublease for Site 1 with a commencement date of 20AA. • Sublease for Site 2 with a commencement date of 20BB. • Less than forty other subleases over various properties. 7. Except for Site 1 and Site 2, Entity 3 invested in the new-building construction and improvement works of the relevant parcels of land and then on-let them to various third parties. Entity 3 has funded its investments in building construction and improvement with a mix of equity and debt funding. 8. Over the next few years, Entity 3 anticipates that it will need to refinance all of its debt in respect of land and improvements covered by the other Subleases. 9. It is also seriously contemplated that all of the other Subleases held by Entity 3 will also be registered with the relevant Land Titles Office (the LTO ). The registration of the Subleases will have the legal effect of enhancing the security provided to the lenders (i.e. as registered, rather than unregistered instruments.) 10. Furthermore, any future subleases entered into by Entity 2, Entity 3, Entity 4 or Entity 5, are expected as a matter of practice to be registered with the LTO at the time any such future sublease is entered into. 11. Site 1 was on-let to Entity 4 under the terms set out in a further lease ( Site Lease 1 ). Site Lease 1 has a commencement date of 20AA. 12. Entity 4 was incorporated in 20AA as a nominee to invest in newly constructed buildings and other improvement works for the purpose of derivation of rental income from the buildings and works. 13. Entity 4 was established in order to separate the commercial risks from Entity 2's lease asset and also as a special purpose vehicle which could not obtain third party bank funding, without impacting on existing lending covenants imposed on either Entity 2 or Entity 3. 14. Subsequent to this, Entity 4 engaged builders to construct buildings and perform improvement works financed by equity and bank funding, and then leased those premises to a third party. 15. Entity 4 currently has a borrowing facility with a third party commercial lender. Entity 4 is looking to refinance this facility imminently, either with the same lender or with another party. 16. In anticipation of the refinancing of bank debt by Entity 4, it is proposed that Site Lease 1 will be registered with the LTO in order to facilitate the subsequent registration of a mortgage in favour of the relevant lender. 17. Site 2 was on let to Entity 5 under the terms set out in a further lease ( Site Lease 2 ). Site Lease 2 has a commenced in 20BB. 18. Entity 5 was incorporated in 20BB, as a nominee to invest in newly constructed buildings and other improvement works for the purpose of the derivation of income. 19. Entity 5 was established in order to separate the commercial risk from Entity 2's lease asset and also as a special purpose vehicle which could obtain third party bank funding, without impacting on existing lending covenants imposed on either Entity 2 or Entity 3. 20. Subsequent to this, Entity 5 engaged builders to construct commercial premises at Site 2. This was financed by equity and bank funding and then by leasing the completed premises. 21. Entity 5 currently has a borrowing facility with a third party commercial lender. Registration process with the Relevant Land Title Office 22. The Subleases and the Site Leases will need to be registered pursuant to the terms of section 71 of the Transfer of Land Act 1958 (Vic) (the TLA) 23. In 20ZZ, the LTO has advised the legal representatives of Entity 3 that subleases covering part of the land in each of the certificates of title are not in a form capable of registration because current LTO practice requires a plan of the premises to include coordinates and dimensions. 24. The premises covered by the Subleases are identified by plans, but those plans in their original form do not meet the current LTO requirements for inclusion of coordinates and dimensions. 25. Revised survey plans will be prepared for all of the premises covered by the subleases in order to satisfy the LTO requirements. To the extent that there is an inability on the part of surveyors to be satisfied that there is no difference between land covered by the original plans and the revised plans, it may not be possible to confirm that all revised survey plans will depict precisely the same demised land as the original plans. 26. To the extent that this is the case, the LTO advised that subleases may be registered by undertaking certain registration steps. The following steps ( the Registration Steps ) will occur in respect of the Subleases, Site Lease 1 and Site Lease 2: • A 'Form SL' (the form of subleasing instrument prescribed by the LTO) is included at the front of each of the subleases, • A revised survey plan is included at the back of the subleases, • The form SL has been completed so that the 'Land' is described by reference to the original plans rather than the revised plans, • A covenant has been added as per the QC opinion, and • These documents will be submitted for lodgement and registration with the LTO. 27. There will be no steps, or dealings in (or with) the Subleases, Site Lease 1 and Site Lease 2 other than the Registrations Steps. 28. The Registration Steps and the actual registrations that are proposed are not default or termination events contemplated by any default or termination clause contained within the Subleases, Site Lease 1 or Site Lease 2. 29. The Commissioner accepts and agrees with the QC opinion on the question of surrender and re-grant of the subleases, obtained by the applicant. Though this opinion is based on Site Lease 1, as an example, we regard the principle of this opinion to apply equally to all of the Subleases and Site Lease 2. 30. On the basis of this opinion, it is accepted that undertaking the registration and Registration Steps of the Subleases, Site Lease 1 and Site Lease 2, do not constitute a surrender and re-grant, or variation of the subleases at general law. 31. The documents that have been provided with the ruling application form part of the facts. Assumptions 32. The Land Titles Office will register the subleases in the form set out at paragraphs 26.

Relevant legislative provisions: section 104-25 of the Income Tax Assessment Act 1997 | section 104-110 of the Income Tax Assessment Act 1997 | section 104-120 of the Income Tax Assessment Act 1997 | section 104-125 of the Income Tax Assessment Act 1997 | section 104-130 of the Income Tax Assessment Act 1997 | subsection 108-5(1) of the Income Tax Assessment Act 1997 | Subdivision 110-A of the Income Tax Assessment Act 1997

Reasons for decision: Summary: The undertaking of the Registration Steps and the registration itself, in relation to Site Lease 1 will not cause CGT event C2 to happen to Entity 4 because the lease does not come to an end. | Detailed Reasoning - Detailed reasoning: The definition of a CGT asset in subsection 108-5(1) includes a legal or equitable right that is not property. A lease, or the rights set out under the terms of a lease, is considered to be an intangible CGT asset owned by Entity 4. CGT event C2 in section 104-25 covers the cancellation, surrender and similar endings of a CGT asset. Subsection 104-25(1) states: CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a *convertible interest - being converted. The question to be answered is whether the Registration Steps and the registration itself of Site Lease 1 will cause Entity 4's ownership of the CGT asset to end. The most relevant type of ending that can apply in this case is paragraph (d) - being surrendered. The term 'surrendered' is not defined in the Act and therefore takes its ordinary meaning. On the basis of the QC opinion provided, the Commissioner accepts that the registration of Site Lease 1 in the form required by the LTO, along with the covenant, will not result in a surrender and re-grant of the sublease at general law. Where there is no surrender at general law, there is also no surrender for the purposes of tax law. Therefore, the Registration Steps and the registration itself will not result in CGT event C2 happening. As there will be no CGT event happening, the cost base of Site Lease 1 will remain the same as previously determined under Subdivision 110-A. | Summary: The undertaking of the Registration Steps and the registration itself, in relation to Site Lease 2 will not cause CGT event C2 to happen to Entity 5 because the lease will not come to an end. | Detailed Reasoning - Detailed reasoning: CGT Event C2 will not happen in relation to the registration of the Site Lease 2 for the same reasons given in question 1. As there will be no CGT event happening, the cost base of Site Lease 2 will remain the same as previously determined under Subdivision 110-A. | Summary: The undertaking of the Registration Steps and the registration itself, in relation to each of the Subleases will not cause CGT event C2 to happen to Entity 3 because each lease does not come to an end. | Detailed Reasoning - Detailed reasoning: CGT Event C2 will not happen in relation to the registration of each of the Subleases for the same reasons given in question 1. As there will be no CGT event happening, the cost base of the Subleases will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 1 will not cause CGT event F1 to happen to Entity 3 because the registration of the lease will not result in or cause the lessor to re-grant, renew or extend the lease. | Detailed Reasoning - Detailed reasoning: CGT event F1 in subsection 104-110(1) happens if a lessor grants, renews or extends a lease. As discussed in the reasons for decision for question 1, the Registration Steps and the registration itself will not constitute a surrender and re-grant of Site Lease 1 at general law. It follows that there will also be no re-grant of the lease for tax law purposes. The registration and Registration Steps will also not result or cause a renewal or extension of the lease. The registration and Registration Steps will have a procedural operation only, and the original lease will not come to an end. Therefore, the Registration Steps and the registration itself do not cause CGT event F1 to happen to Entity 3, as lessor. As there will be no CGT event happening, the cost base of Site Lease 1 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 2 will not cause CGT event F1 to happen to Entity 3 because the registration of the lease will not result or cause the lessor to re-grant, renew or extend the lease. | Detailed Reasoning - Detailed reasoning: CGT Event F1 will not happen to Entity 3 in relation to the registration of Site Lease 2 for the same reasons given in question 4. As there will be no CGT event happening, the cost base of Site Lease 2 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of each of the Subleases will not cause CGT event F1 to happen to Entity 1 or Entity 2 because the registration of each of the Subleases will not result or cause the lessor to re-grant, renew or extend the lease. | Detailed Reasoning - Detailed reasoning: CGT Event F1 will not happen to Entity 1 or Entity 2 in relation to the registration of each of the Subleases for the same reasons given in question 4. As there will be no CGT event happening, the cost base of the Subleases will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 1 will not cause CGT event F3 to happen to Entity 3 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT event F3 in subsection 104-120(1) happens if a lessor incurs expenditure in getting the lessee's agreement to vary or waive a term of the lease. The lessor makes a capital loss equal to the amount of expenditure it incurred. The terms 'vary' and 'waive' are not defined in the Act and therefore take their ordinary meaning. On the basis of the QC opinion provided the Commissioner accepts that there will be no variation to a term of the lease resulting from the registration of Site Lease 1 in the form required by the LTO, along with the covenant. Therefore, the Registration Steps and the registration itself will not cause CGT event F3 to happen to Entity 3. As there will be no CGT event happening, the cost base of Site Lease 1 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 2 will not cause CGT event F3 to happen to Entity 3 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT Event F3 will not happen to Entity 3 in relation to the registration of Site Lease 2 for the same reasons given in question 7. As there will be no CGT event happening, the cost base of Site Lease 2 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of the Subleases will not cause CGT event F3 to happen to Entity 1 or Entity 2 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT Event F3 will not happen to Entity 1 or Entity 2 in relation to the registration of the Subleases for the same reasons given in question 7. As there will be no CGT event happening, the cost base of the Subleases will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 1, will not cause CGT event F4 to happen to Entity 4 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT event F4 in subsection 104-125(1) happens if a lessee receives a payment from the lessor for agreeing to vary or waive a term of the lease. The terms 'vary' and 'waive' are not defined in the Act and therefore take their ordinary meaning. On the basis of the QC opinion provided, the Commissioner accepts that there will be no variation to a term of the lease resulting from the registration of Site Lease 1 in the form required by the LTO, along with the covenant. Therefore, the Registration Steps and the registration itself will not cause CGT event F3 to happen to Entity 4. As there will be no CGT event happening, the cost base of Site Lease 1 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 2 will not cause CGT event F4 to happen to Entity 5 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT Event F4 will not happen to Entity 5 in relation to the registration of Site Lease 2 for the same reasons given in question 10. As there will be no CGT event happening, the cost base of Site Lease 2 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of the Subleases will not cause CGT event F4 to happen to Entity 3 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT Event F4 will not happen to Entity 3 in relation to the registration of the Subleases for the same reasons given in question 10. As there will be no CGT event happening, the cost base of the Subleases will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 1 will not cause CGT event F5 to happen to Entity 3 because there is no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT event F5 in subsection 104-130(1) happens if a lessor receives a payment from the lessee for agreeing to vary or waive a term of the lease. The terms 'vary' and 'waive' are not defined in the Act and therefore take their ordinary meaning. On the basis of the QC opinion provided, the Commissioner accepts that there will be no variation to a term of the lease resulting from the registration of Site Lease 1 in the form required by the LTO, along with the covenant. Therefore, the Registration Steps and the registration itself will not cause CGT event F3 to happen to Entity 3. As will be no CGT event happening, the cost base of Site Lease 1 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of Site Lease 2 will not cause CGT event F5 to happen to Entity 3 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT Event F5 will not happen to Entity 3 in relation to the registration of Site Lease 2 for the same reasons given in question 13. As there will be no CGT event happening, the cost base of Site Lease 2 will remain the same as previously determined under Subdivision 110-A. | Summary: The registration of the Subleases will not cause CGT event F5 to happen to Entity 1 or Entity 2 because there will be no variation or waiver made to a term of the lease by undertaking the Registration Steps and the registration itself. | Detailed Reasoning - Detailed reasoning: CGT Event F5 will not happen to Entity 1 or Entity 2 in relation to the registration of the Subleases for the same reasons given in question 13. As there will be no CGT event happening, the cost base of the Subleases will remain the same as previously determined under Subdivision 110-A.

All references are from the Income Tax Assessment Act 1997 unless otherwise indicated.