Taxman spreads the net on lease-related payments

The taxman has not finished with clamping down on lease-related lump payments.

The latest tax bill, introduced to Parliament last week, contained the already flagged move to tax lease inducements but this was only the start, KPMG tax partner Ross McKinley says.

There were strong indications from Inland Revenue officials that work was under way to extend the approach to other lease-related payments.

“They’re looking at if you assign a lease; key money if you are to sublet, anything like that – all these are now probably going to be brought into the net,” Mr McKinley says.

Some of these had historically been treated as capital account items, he says, but the IRD is gradually moving them to revenue account items and therefore taxable. Some property owners were already treating such payments as revenue, he says, but others were not, and the whole area was seen as untidy.

“The IRD is moving to tidy this whole area up.”

There had been nothing officially announced on this yet but it was likely to see formal proposals circulated sometime in the New Year, he says.

The lease inducement issue itself is controversial, as it changes the law to reverse a long-standing practice which has been endorsed by the courts at the highest level.

The initial introduction also came under fire for taking effect before the legislation was even passed: the IRD released a discussion document earlier this year and said any law change – whenever it actually happened – would take effect from the time that discussion document was released.

That drew heavy criticism, partly because legislation by discussion document was seen as constitutionally dubious and would probably have been overturned if anyone had challenged it in the courts; partly because it was impractical. The government has moved on this issue: the changes will now take effect from April 1 next year.

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Probably one of the few sensible tax grabs the IRD have done in the past year.

The end result is symmetrical tax treatment for both parties so no opportunity to manipulate contracts for tax purposes. And compliance is simple as the amounts are flowing through the P&L anyway (so no tax adjustment required to treat as 'capital').

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