Chapter 3 - Suggested solution

3.1 To address the revenue risks associated with lease inducement payments, this chapter discusses how these payments might be made taxable under the Income Tax Act 2007.

3.2 The changes suggested in this paper are based on legislation operating in the United Kingdom and Ireland, which provides a useful model for New Zealand.[8]

Making lease inducement payments taxable

3.3 Under the suggested solution, an amount derived by a person or an associated person as an inducement to enter into, or in connection with, an arrangement that grants an estate or interest in, or a right in or over, land would be taxable.

3.4 In practice, this would mainly apply to commercial lease arrangements, including subleases, but would also cover licences and easements. The proposal would also apply to a transfer or extension of an interest or right granted in or over land, such as an assignment or renewal of a lease.

3.5 Arrangements involving a sale of land, including a leaseback agreement[9] would be specifically excluded. However, it is expected that lease arrangements with the option to purchase would be covered by the proposed changes. Also, the amounts derived by a person would not be taxable if the person is not able to deduct the amount of rent as their expenditure. This would exclude amounts relating to private residential purposes.

3.6 Under the suggested changes, the lease inducement amount could be paid by any person. Although the person making the lease inducement payment is likely to be a grantor of the interest or right in land (that is, a landlord), they could instead be an associated person. A broad application would preclude avoidance opportunities through lease inducement payments being made by persons other than the grantor.[10] The suggested solution would cover an amount paid by an assignor to induce an assignee to assign the existing lease.

3.7 The amount derived by a person would include not only a lump-sum cash payment but also an amount in money’s worth.[11] Non-cash benefits received by the person as a lease inducement would be included in the person’s income. Examples of non-cash benefits could include:

  • A contribution to a tenant’s costs such as for start-up or relocation. A contribution for depreciable property that is already included in the capital contribution rules (section CG 8) would be specifically excluded.
  • A satisfaction or forgiveness of a tenant’s liabilities. Examples include meeting the tenant’s obligation to pay rent or an early termination payment under the old lease, forgiving debts, or providing interest-free loans.
  • Other non-cash benefits, such as a transfer of shares.

Deductibility of lease inducement payments

3.8 The provisions of the Income Tax Act 2007 would apply to determine the deductibility of lease inducement payments. No special legislation should be necessary. The deductibility of these payments will depend on the taxpayer meeting the general permission in section DA 1.

Timing of income and expenditure

3.9 Under the suggested approach, income from lease inducement payments and expenditure on them would be allocated on a straight-line basis over either the period of the lease arrangement or the period when the first rent review is due, whichever is the shorter. This approach is consistent with the ordinary accounting principles and provisions of the Income Tax Act 2007.[12]

3.10 Officials would prefer a specific legislative solution to provide certainty with timing the allocation of such payments for both income and deduction purposes. Specific timing provisions are currently provided for similar types of payments, such as premiums paid for the grant of leases (that is, the right to use land). Income from lease premiums is spread over six years, subject to the Commissioner’s discretion in section EI 7 of the Income Tax Act 2007. Expenditure on lease premiums is spread over the term of the lease under the depreciation rules and schedule 14. A similar approach could be taken for reverse premiums such as lease inducement payments.

3.11 A specific anti-avoidance provision would be necessary to prevent arbitrage opportunities on the timing of income – for example, arrangements between associated parties with a very long duration that are designed to delay the recognition of income. Similarly, for arrangements that are entered into that require up-front payment but the commencement of the lease is delayed, the income would be recognised in the year of receipt.

Legislative timetable and application date

3.12 The proposal to make lease inducement payments taxable could be included in a tax bill introduced in Parliament later this year, and apply to commercial lease arrangements entered into on or after the day this issues paper is publicly released. This application date would minimise risks to the revenue base and persons entering into commercial lease arrangements after this issues paper is released would be aware of the proposed changes to the rules.


8Sections 99 to 103 of the Income Tax (Trading and Other Income) Act 2005 (UK); and section 98A of the Taxes Consolidation Act 1997 (Ireland).

9When an owner sells the property and it is leased back to them so that they can continue to use the property without owning it.

10Note that the UK and Ireland impose a condition that the payment must be made by the grantor, an associated person, a nominee or a person acting on behalf of the grantor.

11See the definition of “amount” in section YA 1 of the Income Tax Act 2007.

12Sections BD 3 and BD 4 of the Income Tax Act 2007. Also see the New Zealand Equivalent to International Accounting Standard 17 and New Zealand SIC-15 Operative Leases – Incentives.