Capital gains tax: CGT event F5: payment for changing lease

Will the lessor make a capital gain or capital loss under CGT event F5 (section 104-130 of the Income Tax Assessment Act 1997 (ITAA 1997)) on receipt of a payment from the lessee to waive a term of the lease?

Yes. CGT event F5 happened at the time when the lease term was waived (subsection 104-130(2) of the ITAA 1997). The lessor will make a capital gain if the capital proceeds from the event are more than the expenditure the lessor incurs in relation to the waiver. The lessor will make a capital loss if the capital proceeds are less than the expenditure incurred (subsection 104-130(3) of the ITAA 1997).

The taxpayer is the owner of a property which was leased for a number of years.

Under the lease agreement, the lessee was required to paint the property prior to vacating the premises.

The property was not painted in accordance with this term of the lease.

At the termination of the lease the taxpayer accepted a one off payment from the lessee to waive this term of the lease.

Subsection 104-130(1) of the ITAA 1997 states that CGT event F5 happens if a lessor receives a payment from the lessee for agreeing to vary or waive a term of a lease.

In this situation, the taxpayer received an amount from the lessee for waiving the lessee's obligation under the lease to paint the property prior to vacating the premises. CGT event F5 happened at the time that the term was waived (subsection 104-130(2) of the ITAA 1997).

The lessor will make a capital gain if the proceeds from the event are more than the expenditure the lessor incurs that directly relate to the variation or waiver, such as legal costs for drawing up a formal waiver agreement. The lessor will make a capital loss if the capital proceeds are less than the expenditure incurred (subsection 104-130(3) of the ITAA 1997).