The Income Tax Implications of Property Lease Incentives

Friday, 26 Apr 2019

Property lease incentives are offered to entice tenants by landlords of commercial properties. It is typically a discount on the asking lease price which is based on the value of the lease term. It can be offered to persuade a new tenant to sign the lease or to ensure that an existing tenant renews the contract.

Such incentives have become an indelible part of the commercial leasing and negotiation scene in Sydney. These discounts enable the landlords to accommodate the rent according to the changing market conditions and the needs of the tenants. With increasing competition in the field and growing demand for commercial properties, lease incentives have become the game changers in a deal.

For instance, landlords are willing to provide bigger incentives when the vacancy rates are higher as the tenants have many choices in the market. The nature of the incentives can range from rent abatement and reduction to fit-out contributions. However, there are certain income tax implications related to these incentives and your bookkeeper in Sydney can advise you about the taxes related to each method. To make things clear, let us understand the assessment provisions in detail for different incentives.

Rent Abatement

Better known as rent-free periods, rent abatement is a commonly used incentive in the Sydney commercial real estate. It implies that the tenant does not have to pay any rent during the beginning of the lease until his business becomes operational. It usually comprises a timeframe of one to three months and it can go up to one year.

The rental value of the property decides the period of rent abatement and you can take help from your bookkeeper to draft the incentive deed. If the property is huge and has a substantial rent, then the time to set up the office can be raised up to 12 months.

On the other hand, if it is a small office with low rent, the rent-free period may decrease. Since no rent or GST is paid by the tenant during this period, the landlord does not receive any deduction. Also, the benefit of not paying the rent is not considered as income of the tenant, thus making it not assessable.

Rent Reduction

This incentive comes in the form of a decrease in the rent amount as the landlord spreads the cost throughout the term of the lease. As a result, the monthly rent goes down. The reduced rent offered by the landlord or lessor does create an assessable amount.

However, the reduced rent amount is equal to the tax deduction which makes it non-assessable. Similarly, since the reduced rent amount is equal to assessable income, there is no deduction. Thus no amount is assessed to the lessee. Your bookkeeper will keep track of the tax treatment and help you with the assessment of your income.

Fit-Out Contribution

The fit-out contribution can be made either by the landlord carrying out the fit-out work as per the pre-defined agreement signed with the tenant or by the tenant who conducts the work and gets reimbursed by the landlord. The payment is made by the landlord on being shown the receipts which are evaluated by the bookkeeper.

If the landlord owns the fit-out, the money spent on the fit-out is equal to the value of the incentive amount offered in the lease agreement. When the fit-out is owned by the landlord, the amount is not assessable for the lessee/tenant. Therefore, there is no depreciation deduction for decline in the value of the assets used in the contribution.

On the other hand, the landlord cannot claim an immediate expense deduction but can claim a depreciation deduction for decline in the value of the depreciable assets which he must have bought for the office as part of the contribution incentive. Your bookkeeper will inform you about claiming the deduction. When the fit-out is owned by the tenant, the payment made to the tenant by the landlord for the fit-out becomes assessable income.

The lessee can claim a depreciation deduction for decline in the value of the depreciable assets together with an immediate deduction for assets which cost less than $20000 provided it is a small business. So whether you are in Chatswood, Randwick, Parramatta, or any other suburb of the city, you must check the provisions of the fit-out contribution to get a fair deal.

Tax Treatment For Tenants

When the tenants are offered cash incentives from the landlord, the receipt is considered as assessable income. In contrast, the non-cash incentives such as vehicles, boats, costly paintings or artwork, and other benefits that can be converted into cash are taxable at full market value.

For the rest of the non-cash benefits including holiday packages in Sydney and interest-free loans, the tax treatment can vary. For example, holiday packages are tax-free to the tenant and so is an interest-free loan if it is genuine in nature. Your bookkeeping company in Sydney can help you in understanding the tax treatment variations.

Tax Treatment For Landlords

The provision of lease incentives enables an allowable deduction if the landlord’s primary occupation is the leasing of commercial properties in Chatswood, Randwick, Parramatta, or anywhere else in Sydney. The anti-avoidance provisions are applied when the provision of lease incentive is aimed at benefitting an associate or transferring income to an associate.

There is no deduction for interest-free loans as well as the rent-free periods as these are not outgoings or loss. Similarly, there is no deduction for entertainment benefits such as holidays. However, payment for removal expenses and free equipment given to the tenant are deductible. Check with your bookkeeper to know your tax implications and carry out accounting of lease incentives.

Clawback Provisions

The landlords most often include a payback provision in the lease agreement which requires the tenant to pay back the incentive amount in certain situations, such as termination of the lease before the final date due to a breach of the contract.

If you are entering into a lease agreement, then make your bookkeeper and lawyer assess the clawback provisions as they can force you to complete the full term even in case of an unfair practice employed by the landlord.

Conclusion

The commercial market of Sydney is always buzzing with activity. There are as many tenants looking for offices as there are landlords offering lease incentives. Thus it is imperative to understand the variety of lease incentives available in the market to find the most suitable one for your small business. Additionally, you must take your bookkeeper in confidence to know about the tax implications of each incentive.

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