Chapter 1 - Introduction

1.1 This issues paper discusses officials’ concerns with the current tax treatment of lease inducement payments and the resulting revenue risk to the tax base, and suggests a possible solution by making these payments taxable.

Current rules and risks

1.2 A lease inducement payment is a payment given by a landlord to a prospective tenant as an “inducement” to enter into a commercial lease. Following the recent economic downturn, arrangements involving lease inducement payments have become a popular option for landlords to attract tenants without needing to reduce the rental income payable. This trend is reflected in more of these payments being identified by Inland Revenue during its tax audits.

1.3 For income tax purposes, a lease inducement payment is typically tax deductible for the payer (generally the landlord) and non-taxable for the recipient (the tenant). This systematic deductible/non-taxable tax treatment in a commercial context poses a risk to the tax base.

1.4 A lease inducement payment confers a tax advantage when inducing a tenant to enter into a lease arrangement compared with other forms of inducement such as reduced rents and contributions for fit-out costs. As the payments are non-taxable for a recipient, they effectively increase the recipient’s total after-tax income.

Suggested solution

1.5 Given the arbitrage opportunity and revenue risk inherent in the current rules, officials seek feedback on making lease inducement payments taxable. A specific legislative solution would be required to allocate income and expenditure arising or incurred from these payments. Furthermore, an anti-avoidance provision would also be required to prevent arbitrage opportunities arising from the timing of income. The details of these suggested changes are discussed more fully in Chapter 3.

1.6 Officials invite submissions on the suggested solutions. Submissions will be taken into account when we make recommendations to the Government on any necessary legislative changes.

1.7 These would be included in a tax bill introduced in Parliament later this year, and would apply to commercial lease arrangements entered into on or after the day this issues paper is publicly released.


1.8 Submissions should include a brief summary of major points and recommendations. Submissions should also indicate whether it would be acceptable for officials to contact the submitter to discuss the points raised, if required.

1.9 Submissions should be made by 31 August 2012 and be addressed to:

Lease inducement payments
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140


Or emailed to [email protected] with “Lease inducement payments” in the subject line. Electronic submissions are encouraged.

1.10 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Submitters who consider that their submission or any part of it should properly be withheld under the Act should indicate this clearly.