Last month we described changes to the taxation of lease inducement payments
which were proposed by the Inland Revenue in July. This is to you update you on
certain changes to those reforms which were announced yesterday by the Minister
of Revenue (Hon Peter Dunne).
In July the Inland Revenue proposed that lease inducement payments (and
certain other arrangements having similar effect) would give rise to taxable
income in the hands of lessees. That income would be required to be spread on a
straight-line basis over the period of the lease or the period to the first rent
review (whichever was shorter). The changes were proposed to be made effective
from the date of the Inland Revenue's announcement in July.
Click here for further detail on
the Inland Revenue's original proposal.
Changes to the proposed reforms
The Inland Revenue's proposals generated much public comment, particularly
concerning the apparent retrospective nature of the reforms. The Minister of
Revenue yesterday announced changes to the proposals.
The key changes are:
The retrospective nature of the original proposal has been abandoned. The
reforms will apply to inducement arrangements in respect of commercial leases
which are entered into on or after 1 April 2013.
Income and expenditure arising from such payments will be spread evenly over
the term of the lease. The reference to the first rent review date appears to
have been dropped.
A specific provision entitling lessors to a deduction for lease inducement
payments will be introduced into the Income Tax Act, to remove any doubt as to
the ability of lessors to deduct those amounts.
The reforms will be extended to lease surrender payments. Typically, such
payments have been regarded as income to lessors but non-deductible to lessees.
The reforms will now deem lease surrender payments made on or after 1 April 2013
to be deductible to lessees (and income for lessors).
Please note that draft legislation to enact these reforms has not yet been
introduced to Parliament (it is expected before the end of the year). The
proposed reforms may yet change. We will provide a further update on any
developments if and when they occur.
If you have any questions about the possible impact of these reforms on your
business, please contact the authors or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.