Changes to leasing arrangements that could affect you (Pharmacy Guild – May 2013)

If you’re considering entering or exiting a commercial lease arrangement in the coming months, we advise you to contact your advisors to discuss the potential tax implications arising from changes to inducement and surrender payments effective from 1 April 2013.

Lease inducement payments

Lease inducement payments are lump sum cash payments made by commercial landlords to tenants that provide an incentive to enter a lease arrangement. These are particularly common in times of high lease vacancy. In the past, these payments have typically been treated as capital (non-taxable) to the recipient (tenant) and tax deductible to the payer (commercial landlord).

The changes will mean the lease inducement payments become taxable income for the tenant. This is in line with the treatment of other inducement mechanisms such as rent holidays, contributions to fit-out costs, or the opposite situation where a tenant pays “key money” (or an inducement payment) to a commercial landlord.

A new timing rule will spread the income and deductions from a lease inducement payment evenly over the term of the lease. An exception will apply if the lease is terminated prior to conclusion of the original term. The remaining income or deduction amount will be allocated to the income year in which the lease is terminated.

Lease surrender payments

Lease surrender payments are lump sum cash payments made by tenants to commercial landlords that allow the tenant to exit a long-term lease prior to the conclusion of the original agreement. In the past, these payments have typically been treated as taxable to the landlord, but capital (non-deductible) to the tenant.

A matching deduction provision will be provided and in future, these payments will be made tax deductible to the tenant. There are no specific timing rules relating to lease surrender payments and generally, the income and deductions arising from such payments will be allocated to the income year in which the transaction occurs.

The changes effectively create symmetry between the tax treatment for tenants and commercial landlords and are designed to improve fairness and business efficiency by removing existing tax treatments that distort business decisions. An early estimate suggests that the changes could create around $14 million per year of additional tax revenue.

Both of the changes will only apply to commercial lease arrangements entered into on or after 1 April 2013.

Published in Contact Magazine May 2013 by Atul Mehta.

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