"Sweeteners" are increasingly common in the current
commercial property leasing environment, especially in Christchurch
with the influx of space available. However, with the tax
obligations they may not be as sweet as they first seem.
The rebuild in Christchurch is continuing at great pace. We are
seeing a lot of activity amongst our commercial clients, with many
of them investing in commercial and industrial property. There is
also a significant amount of leasing activing, particularly in
industrial areas and also in the CBD.
Lease inducements of one kind or another are common in
Christchurch at the moment. Lease inducements include
"sweeteners" for a tenant, such as cash inducements,
contributions to fit out, and rent free periods. Previously, lease
inducements were tax free in the hands of the tenant, but following
substantial reform in this area of the law over recent years,
tenants now have to pay tax on any lease inducements they
The concept of taxing lease inducements has been discussed since
the late 1990s, but was not such an issue during the economic boom
of the mid 2000s (when there was more competition for space and
therefore lease inducements were not so common). With events such
as the GFC and the Canterbury earthquakes taking a toll on the
Government coffers, the Government is now increasingly keen to
extract as many dollars as it can from the tax system.
Under the current law, lease inducement payments are treated as
taxable income in the hands of tenants and as deductible payments
for the landlord. This differs from the past situation where cash
payments were tax deductible for the payer (typically the landlord)
but non-taxable for the recipient (tenant).
Historically, lease surrender payments (where a tenant pays a
landlord money to exit a lease early) were regarded as income to
landlords but non-deductible to tenants. Now, lease surrender
payments are treated as deductible payments for tenants and income
for the landlord.
At the moment, given the supply of commercial and industrial
space in Christchurch, lease incentives are more common than lease
surrender payments. Accordingly, when negotiating an Agreement to
Lease or a surrender payment, whether you are the landlord or the
tenant, it is important to be clear on the tax status of such
We are happy to assist with this, but we also strongly advise
our clients to speak with their accountant given that this can be a
tricky area. Agreements to Lease are often treated as a "pro
forma" document, but there are many suggested modifications to
achieve a better long term outcome (bearing in mind that your
leasing arrangement may go on for 10-15 years!) As always, it is
best to understand your obligations early, thereby avoiding any
nasty surprises down the track! Please feel free to contact us for
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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