Last month we described changes to the taxation of lease inducement payments which were proposed by the Inland Revenue in July. This is to you update you on certain changes to those reforms which were announced yesterday by the Minister of Revenue (Hon Peter Dunne).
In July the Inland Revenue proposed that lease inducement payments (and certain other arrangements having similar effect) would give rise to taxable income in the hands of lessees. That income would be required to be spread on a straight-line basis over the period of the lease or the period to the first rent review (whichever was shorter). The changes were proposed to be made effective from the date of the Inland Revenue's announcement in July.
Click here for further detail on the Inland Revenue's original proposal.
Changes to the proposed reforms
The Inland Revenue's proposals generated much public comment, particularly concerning the apparent retrospective nature of the reforms. The Minister of Revenue yesterday announced changes to the proposals.
The key changes are:
The retrospective nature of the original proposal has been abandoned. The reforms will apply to inducement arrangements in respect of commercial leases which are entered into on or after 1 April 2013.
Income and expenditure arising from such payments will be spread evenly over the term of the lease. The reference to the first rent review date appears to have been dropped.
A specific provision entitling lessors to a deduction for lease inducement payments will be introduced into the Income Tax Act, to remove any doubt as to the ability of lessors to deduct those amounts.
The reforms will be extended to lease surrender payments. Typically, such payments have been regarded as income to lessors but non-deductible to lessees. The reforms will now deem lease surrender payments made on or after 1 April 2013 to be deductible to lessees (and income for lessors).
Please note that draft legislation to enact these reforms has not yet been introduced to Parliament (it is expected before the end of the year). The proposed reforms may yet change. We will provide a further update on any developments if and when they occur.