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Update on taxation of lease payments

By Melissa Gibson - May 2014

In April and July 2013 we described proposed changes to the taxation of certain land-related lease payments proposed by IRD in April 2013.  The proposed reforms will affect many landlords and tenants of commercial property.  There is currently draft legislation before parliament but the reforms are less extensive than previously thought.

We summarise the key aspects of the draft legislation, being the Taxation (Annual Rates, Employee Allowances, and Remedial matters) Bill (the Bill), which was introduced to Parliament in November 2013.

The Bill proposes to tax, from 1 April 2015, certain lease transfer payments, which can be substituted for taxable lease surrender and lease premium payments. The Bill also proposes a number of technical amendments to tax law relating to leases and licences of land to provide consistency and certainty.

Provided the Bill is enacted, a lease transfer payment will be taxable in the following situations:

  • If the lease transfer payment is sourced directly or indirectly from funds provided by the owner of the estate in land from which the land right is granted.  Such a payment can be substituted for a lease surrender payment.
  • If the person purchasing the lease is associated with the owner of the estate in land from which the land right is granted.  The lease transfer payment can be substituted for a lease surrender payment.
  • If the vendor of the lease is associated with the owner of the estate in land from which the land right is granted.  The lease transfer payment can be substituted for a lease premium.

The Bill is currently before the Finance and Expenditure Committee.  The proposals, if enacted, will apply from 1 April 2015.

Melissa is an Associate in our Commercial Team, specialising in Leases, and can be contacted on 07 958 7440.