Issue
Is expenditure incurred by a lessee on expiry of a lease to restore leased business premises to the condition that they were in at the start of the lease, included in the fourth element of the cost base or reduced cost base of the lease under subsections 110-25(5) and 110-55(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Expenditure incurred by a lessee on expiry of a lease to restore leased business premises to the condition that they were in at the start of the lease is not included in the fourth element of the cost base or reduced cost base of the lease under subsections 110-25(5) and 110-55(2) of the ITAA 1997.
Facts
The taxpayer leased premises to conduct their business. One of the conditions of the lease was that on its expiry, the taxpayer had to restore the premises to the condition that they were in at the start of the lease. The taxpayer did not receive any payment for this action.
Reasons for Decision
A lease is a CGT asset and upon expiry of the lease a CGT event happens (CGT event C2 in section 104-25 of the ITAA 1997).
The fourth element of the cost base and reduced cost base of a CGT asset is capital expenditure incurred to increase the asset's value. However, the expenditure must be reflected in the state or nature of the asset at the time of the CGT event (subsections 110-25(5) and 110-55(2) of the ITAA 1997).
The expenditure incurred by the lessee at the end of the lease to restore the premises to the condition that they were in at the start of the lease was incurred to satisfy an obligation under the lease. The expenditure was not incurred to increase the value of the lease.
Accordingly, such expenditure is not included in the fourth element of the cost base and reduced cost base of the lease under subsections 110-25(5) and 110-55(2) of the ITAA 1997.
Note: Such expenditure may also be excluded from the fourth element of the cost base and reduced cost base if it is not capital expenditure.