Capital gains tax: granting a long term lease over land - lease for a term of 80 years

Is a lease over land for a term of 80 years a long term lease under subsection 104-115(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if, at the time the lease is granted, there are circumstances where the lease may be terminated before 50 years have elapsed?

No. The lease over land for a term of 80 years is not a long term lease under subsection 104-115(1) of the ITAA 1997 because at the time that the lease was granted it was not reasonable to expect that the lease would continue for at least 50 years.

The lessor granted a lease over land to the lessee. The lease is for a term of 80 years.

Under the lease agreement: • the lessor could, at any time and at the lessor's absolute discretion, sell the lessor's interests in the land to the lessee or to a third party; • the lessee could, at any time and at the lessee's absolute discretion, sell the lessee's interests in the lease to the lessor; • the lessee could, at any time and at the lessee's absolute discretion, sell the lessee's interests in the lease to a third party who may, at that time, also acquire the lessor's interests in the land; or • the lessor could, within the first 12 years of the term of the lease and at the lessor's absolute discretion, acquire the lessee's interests in the lease if the lessee does not develop the land in accordance with the lease agreement.

The nature of the lessor and the lessee is such that it is likely that neither party will exist in 50 years time.

CGT event F2 happens if a lessor grants a long term lease over land. A lease can be a long term lease if the lease is for at least 50 years and at the time the lease is granted it is reasonable to expect that the lease will continue for at least 50 years.

The words 'reasonable to expect' were used in paragraph 160ZSA(3)(b) of the Income Tax Assessment Act 1936 , the progenitor of subparagraph 104-115(1)(b)(i) of the ITAA 1997. In the explanatory memorandum to the Tax Law Amendment Bill (No.4) 1989 , in relation to paragraph 160ZSA(3)(b), the Treasurer said: Paragraph (3)(b) requires that at the time the new lease was granted, it was reasonable to expect that the new lease would continue for at least 50 years. The reasonable expectation requirement means that the duration of a lease will be determined at the time the lease is granted. Thus, a lease will not be an eligible long term lease in circumstances where the lease is for a term of more than 50 years but includes a provision for the determination of the lease on the occurrence of an event which is likely to occur before 50 years have elapsed. Where any of the terms of a new lease render it unlikely that the lease will continue beyond a certain date before the expiry of the term of the lease, then it would not be reasonable to expect that the new lease would continue beyond that date. For example, this could occur where the lease provides for the lessee's obligations to become more onerous or for the lessee's rights to diminish after a given date (but the lease includes provision for the lessee to terminate the lease in that event) and those provisions render it unlikely that the lease would continue beyond that given date. ..... Furthermore, where a new lease contains a term providing that the lease may be determined by the lessor giving notice, then ordinarily it would not be reasonable to expect that the lease would continue beyond the earliest date upon which the lease may be determined by the lessor giving such notice.

At the time the lease is granted the intentions of the lessor and the lessee are not to sell their respective interests in the land. However at the time the lease is granted it is likely that neither party will exist in 50 years time. Their stated intentions will not survive their existences.

The intentions of the lessor and the lessee are their own intentions; they are not the intentions of their administrators, successors or assigns. It is not known what the intentions for the lease are in 50 years time.

Under the lease agreement the lessor's interest in the land can be sold to the lessee, or the lessee's interest in the lease can be sold to the lessor, or both interests can be sold to a third party. If this happens, the lease will end by merger with the reversion. The lease will not continue.

The first three circumstances can arise at any time. The fourth circumstance can only occur within the first 12 years. However all circumstances can arise as a result of the direct actions of the persons, who for the time being, are the lessor or the lessee of the land. These actions will occur at the absolute discretion of the relevant party.

CGT event F2 requires that at the time the lease is granted, it is reasonable to expect that the new lease would continue for at least 50 years. There are not grounds for thinking that the lease will continue for at least 50 years. The lease is not a long term lease for the purposes of section 104-115 of the ITAA 1997.