Issue
Where a lease is not obtained, is capital expenditure incurred in trying to obtain the lease expenditure incurred 'in relation to a lease' for the purposes of paragraph 40-880(5)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Where a lease is not obtained, capital expenditure incurred in trying to obtain the lease is not expenditure incurred in relation to a lease for the purposes of paragraph 40-880(5)(d) of the ITAA 1997. There is no lease for the purposes of paragraph 40-880(5)(d) of the ITAA 1997.
Facts
The taxpayer was the lessee of land on which they carried on a business. When the lease expired the lessor decided not to renew it. Instead tenders were called.
The taxpayer incurred legal expenses and consultants' fees in preparing an expression of interest and lease renewal negotiations.
The taxpayer's expression of interest was unsuccessful and the land was leased to another unrelated party.
The legal expenses and consultants' fees incurred by the taxpayer are capital expenditure in relation to the taxpayer's business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997.
Reasons for Decision
All legislative references are to the ITAA 1997.
Paragraph 40-880(5)(d) provides that you cannot deduct anything under section 40-880 for an amount of expenditure that you incur to the extent that it is in relation to a lease or other legal or equitable right.
Capital expenditure is incurred 'in relation to a lease' if it brings a lease into existence or it has a sufficient and relevant connection with a lease that is in existence.
As the taxpayer in this case was ultimately unsuccessful in obtaining a lease there is no lease for the purposes of paragraph 40-880(5)(d). Therefore, the capital expenditure incurred by the taxpayer in trying to obtain a lease cannot be said to be in relation to a lease for the purposes of paragraph 40-880(5)(d).