Cgt on sale of lease?

[Terryw]

I have a friend who has a long term lease on land. He has build a large shed and runs a commercial business on it. A fin planner has suggested he transfer the ownership of the building to his smsf. It has been valued by a bank at 500k and the smsf would pay this amount to the current owner which is a company.

In this instance how would cgt be calculated?

He built the place himself many many years ago out of largely scrap material too.

 

[coastymike]

Terry

Have a look through Subdivision 104-F ITAA 1997. Deals with leases and cgt implications.

 

[Terryw]

Thanks Coasty,

But it is really a lease here? I think he is transferring the ownership of chattels from his company to his SMSF. The SMSF will later lease the chattels back to the company though.

 

[Rob G.]

Hi Terry,

Are you talking about purely the building and not granting a sub-lease of the real estate ?

This is messy enough for property law, however taxation law is even more cumbersome.

I am aware of dubious legal fiction incorporated into taxation law to cope with sale and lease-back of chattels that are Div 40 depreciating assets. For depreciation purposes there is a 'quasi-ownership' right of the purchaser even though the legal owner of any chattels fixed to land is in fact the landowner. (see the Eastern Nitrogen case).

This might possibly be extended to plant fixed to leasehold land as well ... but you would need to get specific advice.

Buildings themselves are unlikely to be Div 40 depreciating assets, I am unsure how Div 43 copes with capital works deductions on buildings not owned under property law.

Granting a lease over any asset is a CGT event, and since no asset is disposed of there is minimal cost base and almost the entire proceeds form the capital gain. (CGT F1).

You mention that your associate holds a long term lease over land.

A more favourable result might happen if the head lease has more than 50 years to run and then grant a long term sub-lease over the land which is treated similar to a disposal (CGT F2).

This is all off the top of my head, I am a bit distracted by work and its late at night so I could have missed something big on this one.

Cheers,

Rob

 

[Terryw]

Thanks Rob, appreciate your assistance.

I am not overly involved in this, but was just asked what I thought of the Financial Planner's suggestion. It sounds good in theory, but he specially says he cannot give tax advice which is where it counts.

The company currently leases land with about 10 years left on the lease. It could be renewed down the track. So it would be, I presume, just the building itself. With the lease being retained by the company. The SMSF would then lease the building back to the company.

It they owned the land it would be much easier to understand.

I will be telling him to get a written opinion from his accountant - but I am not sure if he is up to it.

 

[MikeF]

Hi Terry

As you are no doubt aware, for the SMSF to purchase property from a related party the property has to meet the definition of business real property.

In the Commissioner's view, 'real property' as it is used in the business real property definition is land and fixtures attached to the land, such as buildings.

However my reading of the ruling that covers 'business real property' SMSFR 2009/1 also says:

Fixtures forming part of the land

74. To properly apply the tests in the business real property definition, it is important to identify those fixtures attached to the land that will also constitute 'real property'.

75. Whether a building or other thing is part of the land is a question of fact. Two tests are applied in determining this question:

·
the degree of annexation test; and
·
the object of annexation test.

76. The degree of annexation test considers whether the building or other thing is attached to the land other than by its own weight. If it is, then the building or other thing is considered, at first instance, to be part of the land. Conversely, if it is only attached to the land by its own weight it is assumed, at first instance, that the building or other thing does not form part of the land.

77. Even where a building or other thing has been affixed to the land, it is necessary to consider the object of annexation test - that is, whether the object and purpose of the affixation was for the better enjoyment of the building or other thing itself, or for the better enjoyment of the freehold. A building or other thing is not a fixture and therefore does not form part of the land where it was affixed to the land for the benefit of the building or chattel itself or was only affixed temporarily.

I'm no lawyer but the way I read the above, particularly the last part of clause 77, is that because the building was only affixed for the benefit of itself and not for the better enjoyment of the freehold (the land being leased to a different entity not the SMSF) it is not considered to be a fixture and therefore can not be considered to be business real property.

As the building is not business real property it can not be purchased from a related party.

I'd be interested in other views.

 

[Terryw]

Hi Mike

That is a very good point and something the Fin planner has missed I think. Thank you for pointing it out. It does seem likely that the building would not be real business property.

He also has to consider GST and stamp duty (if any).