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Brief Counsel

Government backs off retrospective law change

27 September 2012

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​Changes to the tax treatment of lease inducement payments—which IRD proposed to impose retrospectively—have now been pushed out to April 2013, the Minister of Revenue announced today.

IRD has also moved to make the tax fairer by providing a deduction for landlords and treating surrender payments the same way as lease inducements.

Chapman Tripp criticised the IRD for the retrospective nature of the policy, and the narrowness of the substantive change.  We are glad IRD has addressed taxpayers’ concerns.

Retrospectivity reversed

The Minister of Revenue has announced that the policy will no longer be retrospective.

The IRD’s proposal on 26 July this year was to make all lease inducement payments taxable, effective from the date of that announcement, even though no legislation had been passed by, or even introduced into, Parliament. 
Mr Dunne’s announcement pushes out the effective date of the proposal to leases entered into on or after 1 April 2013.

Asymmetries abolished

Another problem with the earlier IRD proposal was that it reversed only one asymmetry relating to leases, and even then only on the tax-positive side.  We explained in an earlier Brief Counsel how some taxpayers (typically landlords) treat leases as revenue assets, so that expenditure and receipts on those assets were taxable; but other taxpayers (typically tenants) treat leases as capital assets, so their expenditure and receipts are neither taxable or deductible.

This gave rise to two asymmetries: lease inducement payments were usually deductible but not taxable; and surrender payments were usually taxable but not deductible.  The IRD proposed to make lease inducement payments taxable, but did not address the deductibility of surrender payments.

Additionally, the IRD’s proposed change could have sometimes created its own asymmetry. Where the landlord held the property on capital account, he or she would not get a deduction for a lease inducement payment, while the proposed change would mean the tenant would still pay tax on its receipt.

Both of these asymmetries are proposed to be removed, by mandating in legislation that both lease inducement payments and surrender payments are always taxable to the recipient and deductible to the payer.  This solves both the IRD’s concern with there being a tax incentive to pay a lease inducement and our concerns with the asymmetrical nature of the proposed relief.

We support the Government’s suggested changes to its July proposal, and welcome further opportunities to comment on behalf of taxpayers in the future.  We are happy to assist landlords or tenants who have concerns about the tax treatment of their lease inducements or break fees.

Our thanks to Kyle Rainsford for writing this Brief Counsel.  For further information, please contact the lawyers featured.

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