Q: Are you bound by tax law not yet drafted?

A:  If you’re negotiating to lease commercial premises for your business, you are now subject to an as-yet-unwritten change in tax legislation.  Read on.

Times are tough for many a commercial landlord.  Many buildings are less than 100% occupied with prospective tenants keen to drive a tough bargain before signing a lease.  Often this includes a lease inducement payment – paid by the landlord to the tenant on signing.

As it stands, commercial landlords can generally claim a tax deduction for these payments while the tenant pays no tax on the payment.  This does create an incentive for prospective tenants to push this line when negotiating to lease a building.

But on 26 July, the IRD released a tax policy consultation paper around cash payments made by commercial landlords to tenants.  The Government clearly plans to tax these lease inducement payments in the hands of tenants.

Fair enough.  Of course the Government is quite entitled to do what it needs to do to protect the revenue base.  On the one hand John Key has boldly proposed a return to surplus by the 2014 / 2015 fiscal year – but on the other hand he has ruled out tax rate increases.  So closing asymmetrical tax planning possibilities like this one is an obvious area of focus.

But this amendment is somewhat unusual.  The Revenue Minister Peter Dunne signalled that any legislation changes would be retrospective, with effect from 26 July 2012.  We have no idea of the wording of these proposed amendments as they have not yet been drafted.  They will be included in some future tax bill that could be a year or more away.  But we do know that once passed, these changes will apply to commercial lease arrangements being entered into right now.

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