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Dunne: views sought on taxing land-related lease payments

Hon Peter Dunne
Minister of Revenue

24 April 2013

Dunne: views sought on taxing land-related lease payments

Revenue Minister Peter Dunne has welcomed the release today of a tax policy officials’ issues paper exploring options to reform the rules around land-related lease payments such as lease transfer payments and ‘key money’ payments.

The paper, The taxation of land-related lease payments suggests rationalising the current rules by introducing generic income, deduction and timing rules for all land-related lease payments.

“Rationalising the rules would help overcome current uncertainties where provisions in the Income Tax Act could result in similar payments being treated differently, giving inconsistent results for taxpayers,” Mr Dunne said.

The suggested changes would follow the lease inducement and lease surrender payment reforms introduced in the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill, which is currently before Parliament, he said.

Under the new proposals, payments for leases or licences of land for a term of less than 50 years would be treated as deductible to the payer and taxable to the recipient.

A separate timing rule is also proposed, to spread the income and deductions over the term of the land right. This would give more cohesion to the rules and give greater certainty to taxpayers over how the rules should apply, Mr Dunne said.

The proposals would change the tax treatment of some lease payments from the status quo.

“For example, lease transfer payments that are generally made by incoming tenants to existing tenants for the transfer of a lease, and which are currently non-taxable to commercial tenants, would become taxable under the suggested changes,” Mr Dunne said.

“This is because the current non-taxable nature of lease transfer payments, together with the proposed taxation of lease surrender payments introduced in the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill could distort the commercial decisions of existing tenants.

“Left unchanged, there would be a tax advantage for a commercial tenant to receive a non-taxable lease transfer payment over a taxable lease surrender payment, which is clearly unfair,” he said.

Payments derived by tenants of residential premises are excluded from the proposals.

Other changes under the proposals include making lease modification payments tax deductible that are currently non-deductible to commercial tenants. Also, payments for a permanent easement that are currently taxable would become non-taxable to the landowner.

The timing rules for income from key money would also be rationalised and spread over the term of the lease rather than six years as it is currently.

Together the changes would bring about “a more consistent and coherent tax treatment of land-related lease payments and make it easier for businesses to apply the rules,” Mr Dunne said.

The issues paper, The taxation of land-related lease payments is available on Inland Revenue’s tax policy website, www.taxpolicy.ird.govt.nz. Submissions close on 4 June.


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