On 27 September 2012, the Minister of Revenue, the Hon Peter Dunne, released details of the Government’s decisions on lease inducement payments. Although lease inducement payments by commercial landlords to tenants will be taxable, some important changes have been made as a result of the recent consultation process.

The initial proposal to tax lease inducement payments was contained in the officials’ issues paper released in July 2012. Changes to the initial proposal include the following:

  • The changes will apply to lease inducement payments on commercial leases entered into on or after 1 April 2013.
  • The proposed changes will make lease inducement payments tax deductible by overriding the “capital limitation” on deductions. In the original proposal these were not automatically deductible.
  • Income and expenditure arising from the lease inducement payments will be spread evenly over the term of the lease.

The proposed changes will also apply to lease surrender payments made by tenants to exit a lease early. Currently these are taxable to the landlord, but non-deductible to the tenant. The purpose of these changes is to create a level playing field, thus the lease surrender payments made on or after 1 April 2013 will be tax deductible to the payer and taxable to the recipient.

The reform will not affect residential tenants.

The reform package will be included in a tax Bill scheduled for introduction later this year.