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Chapter 10: Other leases and rights

A case for reform

No consistent framework currently applies for taxing income associated with leases over non-wasting assets and other rights. There are a number of current tax biases against certain rights and leases over non-wasting assets. In other cases, tax benefits can be generated by structuring payments, as may also occur with leases over wasting assets.

A strategy for reform

To move towards taxing leases over non-wasting assets and other rights on a more consistent basis that brings tax value closer to commercial value, subject to practical considerations. In the context of a tax system which taxes many gains on realisation, there is a need to consider in what circumstances the granting of a right over an asset should give rise to a realisation of prior gains.

Key policy issues How could tax outcomes be made independent of any structuring of payments (including removal of biases against upfront payments)? What exclusions should be applied? When should the granting of a right be treated as the realisation of part or all of an underlying asset?
Tax the grantor and grantee on the change in the value of the right or implicit loan relating to service contracts, under one of the following approaches:
- known changes in value;
- implicit benefits taxation approach;
- deemed benefit taxation approach; or
- possible extension of treatment to service contracts.
Rights and service contracts could be excluded where payments are broadly in line with benefits received, and where the overall value of the benefit is small.
Option 1
Partial realisation approach.

Deem a realisation of the same proportion of the underlying asset as the value of the right represents of the full value of the underlying asset.

Option 2
Threshold realisation approach.

Deem a full realisation of the underlying asset if the value of the right is above a fixed proportion of the value of the underlying asset.