The Government has responded to criticism levelled at the proposed changes to the tax treatment of lease inducement payments. The tax changes to lease inducements announced in July had been a surprise as they arrived without consultation and had not appeared on any announced work programs.  

Late last week, responding to some of the concerns raised, Revenue Minister Peter Dunne released details of changes to the original proposals, which were originally to apply to lease inducement payments relating to leases entered into on or after 26 July 2012.  The changes will now apply to leases entered into on or after 1 April 2013.   

Lease inducement payments are lump sum premiums paid to tenants by landlords to induce tenants to lease the landlord's property.  New Zealand case law treats lease inducement payments as deductible payments for landlords but capital, and non-taxable receipts for the tenant.  Under the announced changes, lease inducement payments made in relation to leases entered into on or after 1 April 2013 will be taxable income to the recipient.     

The income would be spread over the term of the lease, as previously announced.  Landlords who pay lease inducement payments are generally entitled to a  deduction for the payment, but from 1 April 2013 will also have to spread the deduction over the lease term 

A welcome further announcement was in relation to lease surrender payments. Lease surrender payments occur when tenants pay the landlord a lump sum amount to exit a long term lease. In most cases lease surrender payments have been non-deductible to the exiting tenant, but taxable to the landlord receiving the payment.  However, under the announced changes, any lease surrender payments made on or after 1 April 2013 will be deductible to the payer and taxable to the recipient. 

With effect from 1 April 2013, landlords and tenants should therefore have symmetrical tax treatment for virtually all receipts and payments.

If you are contemplating entering or exiting any lease arrangements over the next year we strongly recommend you obtain advice from your usual Staples Rodway contact before finalising any agreements.