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Can an amount received by a lessor as a lease surrender receipt satisfy the 12-month rule under subsection 115-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The 12-month rule under subsection 115-25(1) of the ITAA 1997 will be satisfied if CGT event C2 happens to the lessor at least 12 months after the grant of the lease.

A taxpayer is a lessor of a commercial property.

The taxpayer granted a lease over the property. More than 12 months later but prior to the expiry of the lease, the lessee decided that it did not want to continue with the lease and made an offer to the taxpayer for the surrender of the lease.

The taxpayer accepted the offer and received from the lessee a lease surrender payment.

Subsection 115-25(1) of the ITAA 1997 provides that a capital gain is only a discount capital gain if it results from a CGT event happening to a CGT asset that was acquired at least 12 months before the CGT event.

The lessor acquires a CGT asset in granting the lease at the time it enters into the lease agreement, or if there is no contract, at the start of the lease (subsection 109-5(2) of the ITAA 1997).

A CGT event C2 happens when the lessor receives an amount for the surrender of its rights under the lease agreement. The CGT event happens at the time the lessor enters into the contract for the surrender of the lease, or if there is no contract, when the lease ends (subsection 104-25(2) of the ITAA 1997).

The lessor will make a capital gain if the capital proceeds from ending the lease (lease surrender receipt) are more than the asset's cost base.

As the agreement to end the lease was made more than 12 months after the lessor acquired the CGT asset (the lease), the 12 month rule for a discount capital gain will be satisfied.