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Inland Revenue

Tax Policy

PUBLISHED 27 September 2012

Lease inducement payments

Following public consultation, the Minister of Revenue released details of the Government’s decisions on lease inducements payments. For more information, see the media statement.

Hon Peter Dunne
Minister of Revenue

27 September 2012

Media statement

Dunne: lease inducements changes reflect feedback

Lease inducement payments by commercial landlords to tenants will be made taxable, but with some important changes as a result of the recent consultation process, Revenue Minister Peter Dunne announced today.

Changes to the initial proposal to tax lease inducement payments include:

  • Responding to concerns about business certainty, the reform will apply to lease inducement payments on commercial leases entered into on or after 1 April 2013.
  • The proposed reform will make lease inducement payments tax deductible by overriding the ‘capital limitation’ on deductions.
  • Income and expenditure arising from these payments will be spread evenly over the term of the lease.

Mr Dunne said that another important change is that the reform will cover other lease-related payments such as lease surrender payments. Lease surrender payments made by tenants to exit a lease early are, at present, generally taxable to the landlord, but non-deductible to the tenant.

As part of a balanced package, lease surrender payments made on or after 1 April 2013 will be made tax deductible to the payer and taxable income to the recipient.

Mr Dunne said this will reduce non-deductible business expenditure, or so-called black hole expenditure.

“This is consistent with the Government’s efforts to reduce black hole expenditure as part of the 2012-13 tax policy work programme,” he said.

Mr Dunne said it was significant that changes had been made in response to the consultation process.

“A key strength of our tax policy process is its emphasis on consultation, which makes for better legislation.

“The reform package will make the tax treatment of lease-related payments fairer and more efficient for businesses, while removing an existing tax advantage that is distorting business decisions on leases,” he said.

The reform package will be included in a tax bill scheduled for introduction later this year, Mr Dunne said.


Mark Stewart | Press Secretary | Office of Hon Peter Dunne
Cell +64 21 243 6985

Questions and Answers

What will change?

The tax treatment of commercial lease-related payments will be changed. Lease-related payments will become taxable income to a recipient and tax deductible expenditure to a payer.

For example, non-taxable/deductible lease inducement payments will be made taxable/deductible. Similarly, taxable/non-deductible lease surrender payments will be made taxable/deductible.

Lease-related payments will be spread evenly over the term of the lease.

Why is the change being made?

The current tax treatment of non-taxable/deductible lease inducement payments poses a revenue risk. It creates a tax arbitrage opportunity for taxpayers to substitute taxable rent payments with non-taxable lease inducement payments.

Lease inducement payments are tax advantaged compared to other forms of lease inducements such as a rent-free holiday or a contribution for fit-out costs. This tax advantage therefore distorts business decisions on leases.

The revenue concern has increased following the recent downturn in the commercial property market, when there has been an increase in lease inducement payments. In addition, there has been increasing market promotion, highlighting the tax effectiveness of lease inducement payments.

Who will be affected by the change?

Businesses (landlords and tenants) with lease-related payments such as lease inducement or surrender payments will be affected.
This reform will not affect residential tenants.

When will the change apply?

The reform will apply to lease inducement payments on commercial leases entered into on or after 1 April 2013.

The reform will apply to lease surrender payments made on or after 1 April 2013.

The initial proposal referred to a 26 July 2012 application date. Why was this suggested in the first place and what is the reason for the change to a 1 April 2013 date?

The 26 July 2012 application date was initially suggested by officials to minimise risks to the tax base. Strong concerns about business certainty regarding the suggested application date were raised during the consultative process.

In response to these concerns, the Government decided on an application date of 1 April 2013. This application date balances business certainty concerns raised during consultation with the revenue risk associated with lease inducement payments.