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Capital gains tax (CGT) : long term leases of land



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NO. 123

TREASURER

EMBARGO

RELEASE _- ■ ΤΓΤΓιεΜ-'ΤΗ

STATEMENT BY THE TREASURER, THE HON P.J. KEATING MP

CAPITAL GAINS TAX (CGT) : LONG TERM LEASES OF LAND

The Government has decided to amend the capital gains tax provisions of the income tax law relating to the treatment of premiums received by a taxpayer on the grant of a long term lease or sublease of land.

Under the existing capital gains provisions, the grant of a lease or sublease is taken to constitute the disposal of an asset (being the lease or sublease) for a consideration equal to the premium paid or payable for the grant of the lease. Only costs associated with the grant of the lease or sublease

are included in the cost base of the asset deemed to have been disposed of, with the effect that most of the premium received will be treated as a taxable capital gain.

Where a lease or sublease of land (including improvements) is granted for a long term, on terms and conditions that are wholly or substantially the same as those of the freehold or the headlease (respectively), the effect of the transaction

is broadly equivalent to a disposal of the lessor's underlying freehold or leasehold interest in the land.

In recognition of this the Government has decided to amend the CGT provisions so that where a taxpayer grants a long term lease or sublease of land, the taxpayer will be able to elect to have the CGT provisions apply to the transaction on the basis that the grant is a disposal of the underlying

asset.

This election will be available only in respect of a lease or sublease of land granted for a term of more than fifty years which gives the lessee (or sublessee) rights not substantially different from those attaching to the underlying freehold or leasehold interest in the land.

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effect of an election will be -where the lease is granted out of the freehold - to treat the lessor as having disposed of the freehold land and any improvements on the land over which the

lease is granted; or

where a sublease is granted out of a headlease - to treat the sublessor as having disposed of the headlease (or the relevant portion of the headlease) over the land and improvements which are the subject of the sublease.

freehold or leasehold interest in the land will be taken to have been disposed of for a consideration equal to the greater of the premium received or the market value of the relevant freehold or leasehold interest (including any

residual interest retained) at the time the lease or sublease is granted.

Any residual freehold or leasehold interest that the lessor retains will be deemed to have been reacquired at the time of the grant for nil consideration.

The cost base of the leasehold interest acquired by the lessee or sublessee will continue to be determined on the basis of the premium paid to acquire the lease.

The election will also mean that where the taxpayer's interest in the land was acquired before the commencement date of the CGT provisions, 20 September 1985, the grant of the lease or sublease will remain outside the CGT provisions.

However, the CGT rule that treats as a separate asset major capital improvements made after 19 September 1985 on freehold or leasehold land acquired on or before that date will apply where such freehold or leasehold land is deemed to have been disposed of on the grant of the lease or sublease.

Finally, where an election is made the benefit of any building depreciation allowances will be available to the lessee or sublessee and not the lessor during the term of the lease or sublease.

The amendments will apply for a lease or sublease of land granted after today.

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The

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CANBERRA 16 November 1988

Contact Officer: Sandra Peacock Australian Taxation Office Telephone: (062) 751931