Proposals to tax payments for lease transfers abandoned – more targeted measures proposed

Friday 14 February 2014

Authors: Graham Murray and Harry Cundy

​In May last year we described changes to the taxation of certain land-related lease payments proposed by Inland Revenue in its April 2013 Issues Paper The taxation of land-related lease payments (the Issues Paper). The reforms are relevant to many lessees and lessors of commercial property.

Draft legislation currently before Parliament includes proposed changes in this area. However, the reforms are now significantly more modest than those suggested in the earlier Issues Paper.

This article summarises the key aspects of the draft legislation.


Reforms in this area were first signalled last year in the context of the recent reforms to the treatment of lease inducement and surrender payments. As a result of these reforms, such payments are now assessable to the payee and deductible to the payer. (See our earlier article Taxation of lease inducement and surrender arrangements – draft legislation before Parliament).

Specific proposals for reforms in respect of other land-related lease payments were published by Inland Revenue in its April 2013 Issues Paper. (See our earlier article on the Issues Paper Further reforms to tax treatment of land-related lease payments).

Payments received by a lessee for the transfer or assignment of a leasehold estate or a licence to use land (together referred to as land rights) were a particular focus for the Issues Paper. The Paper proposed that such payments would receive the same tax treatment afforded to lease inducement payments where the payment was in respect of the transfer or assignment of a commercial lease or licence of land with a term of less than 50 years. Essentially, land rights with a term of less than 50 years would be treated as being held on revenue account (taxable/deductible). Those with a term of greater than 50 years would be on capital account (non-taxable/non-deductible).

The Issues Paper further suggested that the proposed reforms would also apply to a range of other payments made in relation to leases such as fines, premiums, payments for breach of covenant, payments for termination of leases and fit-out contributions.

Draft legislation introduced

Draft legislation in respect of land-related lease payments is contained in the Taxation (Annual Rates, Employee Allowances, and Remedial matters) Bill (the Bill) that was introduced to Parliament in November 2013.

It appears that Inland Revenue have listened to feedback in respect of the Issues Paper and the amendments proposed in that paper have been significantly scaled back, if not abandoned altogether in the Bill. Previously wide-ranging reforms have been replaced by what are described in the Commentary on the Bill as “targeted base-protection measure[s]” that the Commentary suggests have become necessary, particularly in light of the amendments to the taxation of lease inducement and lease surrender payments mentioned above.

To illustrate the need for these base protection measures, the Commentary on the Bill gives the example in which:

  • a landlord and tenant enter into a 10 year lease;

  • after three years the landlord decides to expand into the business of retail and incorporates a subsidiary company for this purpose; and

  • the landlord wishes the tenant to exit the lease in order that this subsidiary company can carry on its retail business from these premises.

The Commentary notes that if a payment was made by the landlord to the tenant in consideration for the surrender of the lease by the tenant, this payment would be deductible to the landlord and assessable to the tenant. However, if instead the subsidiary company made a payment to the tenant in consideration for the transfer of the lease from the tenant to the subsidiary, such payment would be deductible over time to the subsidiary under the depreciation rules but would generally not be assessable to the tenant.

A similar mismatch is also said to arise where lease premiums are “substituted” for a non-assessable lease transfer payment. For instance, instead of a tenant paying a lease premium to a landlord in consideration for the grant of a lease (such premium being taxable), a landlord might first grant that lease to a subsidiary company which can then transfer the lease to the tenant in consideration for a non-assessable lease transfer payment.

The Commentary notes that the difference between the treatment of these types of payments, and the ability of taxpayers to substitute an assessable lease premium or surrender payment with a non-assessable lease transfer payment, presents a risk to the tax base and is likely to distort business decisions.

To counter these specific risks, the Bill proposes amendments that will, in certain circumstances, treat amounts derived by the holder of a land right (e.g. a lease) as consideration for the transfer or assignment of that land right to another person as assessable income. The circumstances where such amounts are assessable are where:

  • the payment is sourced, directly or indirectly, from funds provided by the owner of the estate in land out of which the land right is granted; or

  • the payee or payer of the amount is associated with the owner of the estate in land out of which the land right is granted.

Status of the proposals and application date

The Bill is currently before the Finance and Expenditure Committee. Submissions to that committee in respect of the Bill closed on 5 February 2014. The proposals, if enacted, will apply from 1 April 2015.​


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.

For more information
  • Graham Murray

    Partner Auckland
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