You may or may not be aware that the government introduced a bill [Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill on 13 September 2012 that advocates the amendment to the tax treatment of Lease inducements and lease surrender payments, this has passed its second reading and is currently before the Committee. During April 2013 the IRD released an issues paper that proposes further changes to the taxation of land-related lease payments. These changes follow the lease inducement and lease surrender proposal and should apply from 1 April of the year following the enactment of the legislation. These proposed rules will supplement and follow the treatment of the proposed changes in relation to lease inducement and lease surrender payments.
Currently there is a mismatch in the treatment of lease transfer payments between the exiting and incoming tenant. The lease transfer payments are generally deductible to the incoming tenant under the depreciation rules and non-taxable to the exiting tenant. The issue here is that should the rules remain unchanged the tenant could chose to exit the lease by transferring it in exchange for a tax free payment, as opposed to surrendering the lease to the landlord in exchange for a taxable payment.
It is proposed that new generic income, deduction and timing rules for all land related lease payments be introduced. These rules will apply to all leases other than residential. This will result in any land related lease to be taxable to the recipient and deductible to the payer.
Summary of proposed new rules:
- The new rules will apply only to land rights (leases or licences of land) that have a term of less than 50 years. Payments made in relation to a land right that lasts more than 50 years will be treated as a payment made in relation to freehold estate. It should be noted that the 50 year term does not include the period of renewal or extension
- Income and deductions will have to be spread over the term of the relevant land right.
- Land related lease payments will include but are not limited to:
- Lease transfer payments
- Payments for a grant or termination of a lease
- Payment of a liability for the breach of a covenant
- Payments to modify or waive the terms of the lease
- Contributions towards fitout
- Goodwill of business where the goodwill is attached to land rather than personal goodwill
Whilst the taxpayers will no longer have the possibility to re-characterise certain payments with the view to achieve desired tax outcome, the introduction of these rules is welcome, as it will take away the uncertainties.
If you are thinking of entering into a lease or exiting a lease please talk to us so that we can assess whether any of these changes will have an impact on you.