In an increasingly competitive market, an incentive / inducement may be offered by a landlord or a tenant in order to secure a lease of a commercial premises or a retail shop. Commercial Lease incentives / Inducements may consist of monetary consideration (e.g. reimbursements for expenses, payments for a specific purpose etc.) or non-monetary consideration (fitouts, motor vehicles, holidays etc.) or a combination of both.
It is important for landlords and tenants to consider the structure of an incentive / inducement in order to access whether they will be liable to pay GST in relation to that inducement.Prior consideration in this regard will allow parties to ensure that any accompanying lease agreement contains appropriate GST recovery provisions to protect their position in relation to GST liability. (Quite separately the taxable income impact of lease incentives / inducement also needs to be considered but that is not subject of this article. That is, when is an incentive taxable income in the hands of a tenant?)
An inducement provided by a landlord to a prospective tenant is commonly referred to as a ‘lease incentive’, whereas an inducement provided by a tenant to a landlord for the grant of a lease is referred to as a ‘lease premium’ (or key money).
GST liability in relation to an incentive / inducement (key money) will need to be considered if:
- a landlord provides a lease incentive, which is consideration for a supply made by a tenant of entry into a lease or an agreement to enter into a lease; or
- a tenant provides a lease premium, which is consideration for a supply made by the landlord of entry into a lease or grant of a lease. It is noted that the supply of an agreement to enter into a lease must be separate (in substance rather than form) from the consideration for the supply of the premises.
Additionally, any supply made by a landlord/ tenant in entering or agreeing to enter a lease, will only be taxable if it is made in the course or furtherance of an enterprise. This is generally uncontroversial in a commercial context because the leasing of premises by a landlord, is of itself, an enterprise.
In that addendum, the ATO elaborated on the New Zealand Case S41 17 NZTC 7280. In that case partners in a partnership were paid an incentive amount of $137,500, pursuant to an Inducement Deed. The incentive “was by way of inducement for the partners to procure the partnership to enter into and execute” a Heads of Agreement to lease office premises, with a formal Lease to follow after.
The partners submitted they had negotiated the inducement as individuals in their own right.
However, the Taxation Review Authority held that:
- there was a supply of services by the partnership in agreeing (or being procured) to enter into the lease, and the partnership was acting in the course or furtherance of its taxable activities; and
- obtaining business premises was part of the partnership’s business activities, although the partnership was not in the business of entering into leases.
For more information regarding Commercial Lease Incentives
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