The main concern is payments made to an exiting tenant from a new incoming tenant for the transfer or assignment of a lease (so-called “lease transfer payments”), which are currently non-deductible to the recipient but depreciable to the payer.
The new rules will also capture lease premiums, lease modification payments and, significantly, contributions towards fit-out.
A wider review of this area was signalled last year, and the outcome is not surprising. That said, we are not convinced that the arrangements contemplated by Officials – the re-characterisation of (revenue) surrender payments as (capital) lease transfer payments – is widespread in practice as the commercial drivers are different.
The proposed changes to the fit-out contribution rules, to align the treatment with cash lease incentives, should also be noted.