Chapter 5 - Application date and potential transitional issue
5.1 This chapter discusses the application date and a potential transitional issue arising from the implementation of the proposed new land-related lease payments rules.
Application date
5.2 These suggested changes, if they proceed, would apply to payments derived or incurred on or after the 1 April date following the enactment of the amending legislation.
Disposal of the right to use land acquired before the application date
5.3 Consequential to rationalising the existing rules, the “right to use land” category of depreciable intangible property in clause 5, schedule 14 of the Income Tax Act 2007 would be repealed.
5.4 If implemented, the new deduction provision would apply to any expenditure incurred for the right to use land (referred to as “the land right” under the proposed new deduction provision) after the application date. Any expenditure incurred for the right to use land before the application date would continue to be deductible under the depreciation rules.
5.5 To accommodate transfers of leases and licences to use land after the application date, a transitional rule would be introduced for a person who acquired the right to use land before the application date.
5.6 Under the proposed rules, if the person disposes of (transfers) their right to use land to another person after the application date and receives consideration for the disposal, the amount of consideration would be treated as income of the person (proposed new section CC 1). The entire amount of consideration would be allocated to the year of receipt because the amount is derived at the end of the spreading period (proposed new timing provision).
5.7 To prevent depreciation recovery income also arising for the person from the disposal of the right to use land, section EE 45 would be amended. The amount of consideration derived for the disposal of their right to use land would not be included for depreciation recovery income purposes under section EE 48. In the year of disposal, the person would be able to deduct a depreciation loss for the adjusted tax value of the right to use land under section EE 48(2).
Example – tax implications for disposing of the right to use land acquired before the application date[20]
On 1 April 2011, a tenant pays a landlord a $100,000 lease premium to enter into a 10-year lease. After three years, the commercial property market tightens and there is a shortage of commercial premises. On 1 April 2014, the tenant disposes of (transfers) the lease to a third party and receives $150,000 consideration for the disposal. Taxpayers have a 31 March balance date.
From 1 April 2011, the tenant is able to deduct $100,000 of lease premium on a straight-line basis over the next 10 years under the depreciation rules.
In the 2014–15 income year, the tenant would be required to make the following calculations under the depreciation rules (section EE 48):
| Amount of lease premium | $100,000 |
| Less deductions | $30,000 |
| Adjusted tax value (ATV) | $70,000 |
| Consideration for the lease | $0* |
*Note that consideration would be treated as $0 for the calculation under section EE 48. Section EE 45 would not treat the $150,000 lease transfer payment as consideration.
In the 2014–15 income year, the tenant would have a depreciation loss of $70,000 ($70,000 ATV minus $0) for disposing of the right to use land. The tenant would be taxed on $150,000 consideration received from the new tenant for the transfer of the lease (new section CC 1 and the new timing provision). The tenant would therefore have net income from the lease for the year of $80,000.
From the 2014–15 income year, the new tenant would be able to deduct $150,000 over the remaining term of the lease under the new deduction and timing provisions.
The income tax implications for the tenant and the new tenant is illustrated in the table below:
| Income year | Tenant (transferor) | New tenant (transferee) | ||
|---|---|---|---|---|
| Deduction | Income | Deduction | Income | |
| 2011–12 | $10,000 | – | – | – |
| 2012–13 | $10,000 | – | – | – |
| 2013–14 | $10,000 | – | – | – |
| 2014–15 | $70,000 | $150,000 | $21,429 | – |
| 2015–16 | – | – | $21,429 | – |
| 2016–17 | – | – | $21,429 | – |
| 2017–18 | – | – | $21,429 | – |
| 2018–19 | – | – | $21,429 | – |
| 2019–20 | – | – | $21,429 | – |
| 2020–21 | – | – | $21,429 | – |
20 The example is based on an assumption that the proposed new rules apply from 1 April 2014.