Leasing land tax implications?

Question from Michael updated on 10th February 2010:

We have a number of sections and a house in a LAQC and are classified as a property development company subject to capital gains tax. We are considering leasing the sections for 5 years with an option to the lessee purchase at the end of the lease period. Can you advise what the tax implications of this arrangement will be?

Our expert Mark Withers responded:

The definition of land includes equitable interests in land and leasehold interests in land. This means any income derived from the sale of the leasehold interest is likely to be considered income of your development activity. There may also be issues around the timing of recognition of income. This will depend on the wording of your option to purchase.

Gasparins case held that income from the sale of development land is recognised on settlement because this is the point where you can sue for specific performance of the contract. You sould also be careful with GST. Any land sold subject to a long term sale and purchase agreement ( in excess of one year) must be returned on the invoice basis where the supply is in excess of $225000. This means that at the point where your purchaser in posession pays money in relation to the supply of the property you may trigger a GST liability on the entire supply.

This can cause a cashflow problem if the purchaser isn't required to settle until a time after you are required to account for the GST. Given that the lease payment isn't residential rental it is also likley that the rent payments will attract GST. Again, the drafting of the option agreement will determine the timing of the triggering of the supply for tax purposes. I'd recommend you get the lease and option agreements reviewed by a tax lawyer before they are presented to your interested party.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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