LEASE INCENTIVES DO NOT MEAN TAX BURDENS FOR TENANTS

Recent judicial decisions have clarified the tax implications for tenants who accept certain incentives for relocating their business premises. The decisions indicate that tenants who receive lease incentives are unlikely to be taxed on them as long as they do not try to profit from the incentive and as long as it relates to the structure of the business and not its operation. In one case it was held that lease incentives generally are capital receipts and therefore not assessable for income tax purposes. In two out of three leading case involving firms of solicitors as tenants, it was found that a profit motive was not the reason for a tenant moving premises, except in the sense that the location brings more clients or customers. One of these cases involved a law firm whose landlord needed them to move before their lease was up because of the need to remove asbestos and consequent renovation to the site. This occurred at a time of a favourable market for office accommodation tenants and while the firm was offered a higher rent than it had been paying, there was an incentive which amounted to nearly $30 million. The amount covered the cost of the fitout but the firm’s partners also received a share, which the Tax Commissioner then treated as assessable income. The case was appealed and as a result the incentive payments were not found o be taxable because the firm did not enter the incentive agreement intending to profit by it, and because the arrangement was not an ordinary incident of the firm’s legal practice. A further case involved a shop tenant who received a contribution of $40,000.00 towards a fitout. The tenant did not gain anything beyond utilising the benefit for the fitout. It was not a profit or gain made by the tenant in the normal course of business, nor was it found to be taxable. Paul Bailey (Source: Law Society Journal) paulb@gells.com.au

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