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Chapter 8: Towards a new policy framework for leases and rights

A case for reform

The current taxation of leases and rights does not tax income on a consistent basis, but instead there is a complex mix of different rules based on legal form rather than substance. This creates inconsistent outcomes, and disadvantages some taxpayers while others receive significant tax advantages. Complex arrangements also exist in relation to tax exempts.

Tax bias against certain leases and rights
Lump sum payments for the granting of some rights are taxed immediately on receipt, but are not deductible to the grantee except as a capital loss on the termination of the right.
Tax benefits from the use of leases and other rights
Some taxpayers can gain tax benefits by structuring lease and right payments differently from the cost to the grantor of providing the asset.

Low tax rate entities can obtain access to the benefits of tax preferences (such as accelerated depreciation) through leasing and other rights.

Some taxpayers can generate unwarranted tax benefits by assigning (or selling) leases to tax exempt or low tax rate entities.

Tax-exempt leasing
The ability of tax exempt entities to gain tax benefits by structuring payments and accessing tax preferences through leasing and similar arrangements is restricted by section 51AD and Division 16D.

Both provisions are complex and section 51AD is also severe in its impact where it applies.

A strategy for reform

To move towards taxing leases and rights on a more consistent basis that moves tax values closer to commercial value, subject to practical considerations. The issue of whether or not to permit transfer of tax preferences also needs to be addressed.

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With respect to leases over wasting assets and similar arrangements (see Chapter 9).
With respect to leases and other rights over non-wasting assets (see Chapter 10).