Taxing lease incentives – changes on the way

The government’s measures to increase their tax take through the targeting of the property industry looks set to continue. First we had the erosion of depreciation, followed by the changes to loss attributing qualifying companies. Now the government is proposing to change the way it taxes lease inducement payments.

In the current economic environment it is common for landlords to provide a prospective tenant with an inducement to encourage the tenant to enter into a lease. This may be in the form of a lump sum cash payment. Under the current income tax provisions, the payment of the cash incentive would normally be tax deductible for the landlord, on the basis the expenditure has occurred in the course of carrying on a business. The incentive is usually non-taxable for the tenant if the payment is received in relation to a lease that relates to the structure of the tenant’s business.

The government is proposing to tax the cash incentives received by the tenant, so that income tax is paid by the tenant. There would be no change to the lessor’s tax liability, as the incentive would remain generally deductible. However the timing of those deductions may also be pushed out.

The proposed tax changes would apply to commercial leases, subleases and licenses, with sales of land, lease backs and residential leases excluded.

Whilst the nuts and bolts of the legislative changes are yet to be ironed out and only draft proposals are out there, these changes are proposed to be retrospective if adopted. Incentives paid on or after 26 July 2012 would be caught. For now it is very much ‘watch this space’. The form or amount of incentives might be negotiated more heavily in the meantime.

By Jourdan Griffin
AlexanderDorrington, Lawyers

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