Tax changes loom for commercial landlords

Revenue Minister Peter Dunne has set his sights on taxation around inducement payments in the commercial property sector. Photo / NZH

The government is looking to tighten its tax base by homing in on the trend of landlords enticing prospective tenants with tax-free cash payments.

Inland Revenue (IRD) has just released a paper proposing changes to the taxation of lease inducement payments.

A lease inducement payment an unconditional lump sum cash payment from a landlord to a prospective tenant as a way of 'inducing' them to lease a commercial property.

Revenue Minister Peter Dunne said these types of payments had become popular in the current tight economic environment as landlords looked to attract tenants without needing to reduce rents.

"Currently, commercial landlords can generally claim a tax deduction for these payments while the tenant pays no tax on them," Dunne said.

"This gives the tenant an unfair tax advantage over other lease inducements such as reduced rents or landlord contributions towards fit-out costs."

The proposed change was consistent with the Government's efforts to protect its revenue base and make the tax system fairer for all taxpayers, he said.

"The proposed reform would also bring the New Zealand tax rules into line with the tax treatment of similar payments in the United Kingdom, Ireland and Canada."

PricewaterhouseCoopers tax partner Geof Nightingale said the current system created an "asymmetry" which caused a net revenue loss to the tax base.

"It's not a loophole but I would describe it as a deficiency in the law."

He said the proposed changes were likely to be controversial in the commercial and industrial property industry.

"I think the industry reaction will be that this is another tax cost imposed on them.

It would be "a bit hard" to argue against the proposed changes though, he said.

It was a sign of the Government's intent to maximise revenue out of the existing tax system, as foreshadowed in the 2012 Budget, he said.

"The outcome arises because New Zealand does not generally tax capital gains or losses," he said.

"However, this principle is being restricted by more and more specific changes like this."

Nightingale said IRD should also be addressing the reverse process where tenants made lease termination payments, which are taxable only to landlords when received.

"They should fix that up at the same time."

Dunne said the proposed reforms could be included in a future tax bill and would immediately apply to commercial lease arrangements entered into.

The taxation of lease inducement payments paper is open for submissions, which close on August 31. Details on making submissions can be found here in Section 1.8.