Converting crown leases into freehold

In Queensland, ‘Crown Leases’ are leases for grazing or other agriculture purposes issued under the Land Act 1994, which replaced the old Land Act 1962, and consolidated some of the old type leases into three new main types.

These three new main types are:

• Term Leases,
• Perpetual Leases, and
• Freeholding Leases.

Freeholding Leases

The last of the above leases, a freeholding lease, allows a landholder to choose to pay the purchase price of the property through lease payments over a number of years, with the final instalment converting the crown lease into a freehold title.   

Term leases and perpetual leases

Term leases (held mainly for 50 years) and perpetual leases (held in perpetuity) have no such automatic conversion, but the lessee may, by applying to the chief executive (sometimes following an offer from the chief executive), convert their leases into freehold titles.

Income tax outcomes to consider

At first, it might be thought a no-brainer to convert the crown leases into freehold, leaving behind all the government oversight and risk of changes, as well as gaining security of tenure and peace of mind, but as usual the income tax outcome needs to be carefully considered.

Converting crown leases into freehold titles produces four different capital gains tax (CGT) answers depending on which CGT concession you are trying to obtain:

1. Crown leases originally entered into before 20 September 1985 are Pre-CGT and on conversion to freehold, the new freehold remains Pre-CGT, so that when the freehold title is sold, no capital gains tax is paid, no matter how recently the crown lease was converted to freehold.
2. If the lessee is an individual or trustee, post-CGT freehold titles obtained by converting a crown lease keep the original lease grant date when working out if the property has been held for more than 12 months, making the capital gain on sale eligible for a 50% discount.
3. Apart from the 50% discount, crown leases entered into post-CGT and converted into freehold titles might be able to access the CGT Small Business Concessions if the turnover of the group is less than $2 million (or the net assets are less than $6 million – for owner operators). However, one of the most valuable of these concessions is the ‘15-year exemption’ for post-CGT properties held for more than 15 years.
4. Although there is a ‘rollover’ so no CGT is triggered simply when the crown leases are converted to freehold titles, the new freehold titles do not keep the original lease acquisition dates.  This means that even if the lease is more than 15 years old, a simple conversion to freehold title means that the 15-year period starts all over again, and when the farm is sold, the owner would have to rely on other small business CGT concessions possibly resulting in some residual capital gains tax to pay.

In these cases, it might be better not to convert, or to have an internal sale of the lease (especially in conjunction with succession planning) claim the 15-year exemption, and then for the new related owner to convert to freehold and have a stepped-up cost base for any later sale of the freehold title.  

Other strange results can come about from older leases passing through deceased estates, crown leases that are a combination of  pre-CGT and post-CGT leases, and where the property owner uses a related company, partnership or trust to run the agricultural business.

How Exant Advisory can help

If your business is subject to Crown Leases and you want to examine options as you move into the future, please contact your usual Exant Advisor or our business advisory specialists Tim Mouritz and Dean Rallison via the form below or on 07 3218 3900.

Authors: Tim Mouritz (Agribusiness) & Dean Rallison (Tax)