Taxation of lease inducement and surrender arrangements draft legislation before Parliament

Friday 31 January 2014

Authors: Jarrod Walker and Jenny Sullivan

In August and September last year we described changes proposed by ​the Inland Revenue to the taxation of lease inducement and surrender arrangements. Draft legislation containing the proposed reforms was put before Parliament in December.


In July last year the Inland Revenue proposed changes to the taxation of lease inducement payments. Payments to induce a prospective tenant to take up a lease would become taxable in the hands of the tenant regardless of whether that lease may be a capital asset of the tenant, effectively reversing the decision of the Privy Council in the 1998 Wattie case. The reforms would extend to arrangements having a similar effect to inducement payments, such as contributions to a tenant’s start-up or relocation costs and the meeting or forgiving of a tenant’s rent or early termination obligations under an existing lease.

In response to public criticism, the originally proposed retrospective application of the reforms was abandoned in favour of a 1 April 2013 application date. In addition, the Government announced that the deductibility of inducement payments for landlords would be specifically legislated for, and that the reforms would be extended to lease surrender payments (surrender payments would be treated as assessable to landlords and deductible to tenants).

Please refer to our earlier articles for further detail about those early proposals (Changes to Taxation of lease inducement payments and Update on proposed changes to taxation of lease inducement payments).

Draft legislation introduced

The proposed reforms were introduced to Parliament in December by way of a Supplementary Order Paper (No. 167) to the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill currently before Parliament.

Key aspects of the draft legislation (in its present form) are:

  • The new taxing provision (to be included in the Income Tax Act as new section CC 1B) will apply where a person (the "payee") derives an amount as consideration for the agreement by that person to the grant, renewal, extension or transfer of a right (a "land right"), being a leasehold estate or licence to use land. The amount derived will be income to the payee ("amount" for these purposes will include non-cash consideration).

  • Two exceptions to the new taxing provision will be included. The inducement amount will not be income to the payee where the payee is a tenant of residential premises, or where the payee is the holder of the land right and receives the amount in return for the transfer of that right to the payer (the example given by the Inland Revenue is an amount derived by an assignor from an assignee for the transfer of an existing lease).

  • A matching deduction provision will be introduced (new section DB 20). The inducement payment will be deductible to the payer provided certain conditions are met. These include that the payer owns the land right or estate in land from which the land right is granted, and that the payee is the person who is obtaining the land right.

  • A specific timing provision will be introduced (new section EI 4B) to spread income derived and expenditure incurred under a lease inducement arrangement. The timing provision as currently drafted is not easy to interpret and could benefit from simplification, but in essence the income or expenditure will be spread over the term of the land right to which the inducement arrangement relates (e.g. the term of the lease granted). If an inducement payment is made prior to the commencement of the relevant lease, the spreading will still be across the period of the lease (it will not commence at the point the payment is made). Particular rules will apply where the payment is incurred or derived during or at the end of the lease. Rules will also govern the interrelationship of the new regime with the existing capital contribution timing provisions.

The draft legislation also applies to lease surrender payments. New section CC 1C will tax amounts derived by a person as consideration for the agreement by that person to the surrender of a leasehold estate or termination of a licence to use land. This new rule will apply where the payee is either the landlord or the tenant (i.e. a tenant which receives a payment to exit a lease will be taxed on that payment, as will a landlord which receives a surrender payment from a tenant).

A matching deduction provision for lease surrender payments (new section DB 20C) is included in the draft legislation. However, no new timing provision will be introduced with respect to lease surrender payments. The time at which those payments are incurred or derived for tax purposes will remain to be determined on the basis of the existing rules in the Income Tax Act (generally, the year of incurrence or derivation of the surrender payment). This is not surprising given that a surrender payment relates to the termination of an arrangement.

Submissions on the draft legislation

The draft legislation containing the changes is currently before the Finance and Expenditure Committee. Submissions to that committee on the draft legislation can be made on/or before 7 February 2013.

If you have any questions about the possible impact of these reforms on your business, please contact the authors or your usual Bell Gully advisor.


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.

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