Are Lease Incentives Income?
The ATO’s approach to lease incentives
Landlords often provide incentives to induce tenants to enter into leases.
These incentives can take many forms such as large up-front cash payments, non-cash items, rent-free or rent-discounted periods, free fit-out, payment of removal costs, interest-free loans, or a combination of any of these incentives.
In relation to both cash and non-cash incentives, the question must be asked, does the benefit have an income character for the purposes of taxation?
The Australian Taxation Office (ATO) has outlined their approach to these incentives in Taxation Ruling No. IT2631.
For cash payments it is not difficult to characterise this incentive as income, and they are taxed as such. For non-cash incentives the approach of the ATO can be summarised as follows:
- Rent-free periods – effectively tax-free.
- Interest-free loans – effectively tax-free, provided they are genuine business loans and not disguised cash payments.
- Free fit-outs –
- If owned by landlord – effectively tax-free.
- If owned by tenant – assessable but a deduction will be allowed for depreciation to the extent that the fit-out qualifies as depreciable plant or articles.
- Free holidays – complete holiday packages comprising travel, accommodation, meals and recreation will be effectively tax-free to the tenant, as the cost will not be deductible to the Landlord.
- Free equipment such as computers – assessable but a deduction will be allowed for depreciation.
- Payment of removal costs – fully taxable except to the extent that the costs relate to revenue items such as trading stock.
- Payment of surrender value of existing lease – fully taxable.
It is important for both landlords and tenants to understand the taxable treatment of lease incentives when considering such incentives during the offer to lease process.
If you have any queries regarding leases please contact our Commercial Property team at your Gold Coast Lawyers, McLaughlins Lawyers.
Director: Ian Kennedy