Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 2.20 - Leases
Overview
This segment covers the special rules for cost base modifications and timing of acquisition for lessors and lessees in Division 132.
Part A summarises these rules.
Part B explains changes proposed to the 1936 Act.
Part C explains why some provisions of the 1936 Act have not been rewritten.
A. Summary of the new law
Division 132 makes modifications to the cost base of a lease where the lessee or lessor incurs expenditure relating to the lease in three situations:
- •
- the lessee pays to have a term of the lease varied or waived;
- •
- the lessor pays the lessee for lease improvements;
- •
- the lessor pays to vary or waive a term of a long term lease.
It also has rules to determine the time of acquisition of, and the expenditure of a lessee to acquire, the lessor's reversionary interest in land.
Expenditure to vary or waive a lease term
If a lessee incurs expenditure for the variation or waiver of a term of the lease, the amount is included in the cost base of the lease. [section 132-1]
Expenditure for lease improvements
If, at the end of the lease, the lessor pays for expenditure of a capital nature incurred by the lessee in making improvements to the leased property, the amount paid is included in the cost base of the property. [section 132-5]
Expenditure to vary or waive a term of a long term lease
If a lessor pays the lessee for a variation or waiver of a term of a long-term lease (ie. a lease for at least 50 years), the amount is included in the cost base of the property. [subsection 132-10(3)]
Lessee of land acquires reversionary interest
If the lessee acquires the lessors reversionary interest in land, this is treated as an acquisition of the land by the lessee. Specific rules determine the time of acquisition of the land and the amount for which it is acquired.
[section 132-15]
| Type of lease | Time of acquisition | Amount for acquisition |
|---|---|---|
| Term of lease was 99 years or more. | When lease was granted or assigned. | Any premium paid for grant of the lease plus amount paid to acquire reversionary interest. |
| Lease granted after 19/9/85 for less than 99 years. | When reversionary interest acquired. | Any premium paid for grant of the lease plus amount paid to acquire reversionary interest. |
| Lease granted before 19/9/85 for less than 99 years. | When reversionary interest acquired. | Market value of the land when the reversionary interest acquired. |
B. Discussion of changes
Division 132 contains special rules for some lease transactions.
In contrast with Division 5 of Part IIIA of the 1936 Act, which contains most of the rules for lease transactions, the structure of the rewritten provisions is such that most of these rules will be in more general Divisions, for example, Division 104 - CGT events and Division 116 - Capital proceeds. Rules that are not dealt with in those Divisions will be contained in Division 132.
Section 132-1 Lessee incurs expenditure to get term of lease varied or waived
Ensure that expenditure for the variation or waiver of a term of the lease forms part of the cost base of the lease.
The expenditure to vary or waive a term of a lease arguably does not meet the description of allowable expenditure in the existing cost base rules.
Section 132-1 states that such amounts are an element of the cost base and reduced cost base of the lease. This reflects current administrative practice.
C. Provisions of the old law that have not been rewritten
Some provisions of the 1936 Act have not been rewritten for reasons summarised in the following table:
| Provision | Subject | Reason for omission |
|---|---|---|
| 160ZR | Lease includes a sub-lease. | This provision is unnecessary. |
| 160ZSA(2) | When an election must be lodged. | Formal elections are no longer required under self-assessment. |