Issue
Is expenditure incurred by a lessee for the surrender of a lease included in the fourth element of the cost base or reduced cost base of the lease, under section 132-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Expenditure incurred by a lessee for the surrender of a lease is not included in the fourth element of the cost base or reduced cost base of the lease under section 132-1 of the ITAA 1997.
Facts
An Australian resident company (the lessee) enters into a 20 year lease for property located overseas.
Five years into the term of the lease the lessee requests that the lease be terminated.
The lessor agrees to the termination of the lease if the lessee pays a lease surrender payment.
The lessee makes the payment and the lease is terminated.
Reasons for Decision
Under section 132-1 of the ITAA 1997, if the lessee of property incurs expenditure in obtaining the consent of the lessor to vary or waive a term of the lease, the fourth element of the lease's cost base or reduced cost base includes the amount of that expenditure.
The words 'vary' and 'waive' used in section 132-1 of the ITAA 1997 are not specifically defined for income tax purposes in the ITAA 1997. Therefore, the ordinary meaning of the words is used.
The Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne defines 'vary' as 'make different, modify, diversify', and 'undergo change, become or be different'. 'Waive' is defined as 'refrain from insisting on or using (a right, claim, opportunity, legitimate plea, etc)'.
Accordingly, expenditure incurred to vary or waive a term of the lease refers to the consideration given to amend or alter a continuing lease. A lease surrender amount refers to the consideration given or received for surrendering a lease.
A lease surrender constitutes a disposal of a Capital Gains Tax asset (that is, the lease) and the ending of contractual rights under the lease. A lease surrender can be contrasted to a mere variation or waiver of a term of a continuing lease. Expenditure incurred in obtaining a variation or waiver of a term of a lease falls for consideration under Subdivision 104-F (about leases) of the ITAA 1997.
The surrender of the lease by the lessee does not constitute a 'waiver' or 'variation' as contained in section 132-1 of the ITAA 1997.
Accordingly, expenditure incurred by a lessee for the surrender of a lease is not included in the fourth element of the cost base or reduced cost base of the lease under section 132-1 of the ITAA 1997.