EXOTIC enticements such as luxury boats and overseas holiday are no longer a regular feature of major lease agreements in Perth.
EXOTIC enticements such as luxury boats and overseas holiday are no longer a regular feature of major lease agreements in Perth.
However, rent-free periods and cash contributions to fit-outs still need to be carefully considered if tenants wish to avoid the impost of income tax.
Whether a cash contribution is considered income or capital is an important issue in major lease negotiations.
In a recent case decided in the Federal Court of Australia, Judge Goldberg decided that an amount of $8,009,000 provided to Peat Mar-wick as part of a lease agreement was considered income.
Robert O’Connor QC recently presented a paper at the Taxation Institute of Australia forum.
Part of this paper looked at lease inducements and the distinction between capital and income receipts.
“In the [Peat Marwick] O’Connell case, it was a big chartered accounting firm and it knew lessors would want to get it in to take out maybe five floors of a new building,” Mr O’Connor said.
“It [the chartered accounting firm] played that fact pretty strongly and they realised all along that this was one of their big advantages.
“So it was decided to structure things in a way that it got a good amount of money.”
He identified a number of issues that played a role in determining whether a cash sum offered as a lease incentive could be considered income or capital.
Issues such as the extent to which big clients exploit their position in the lease market and the incidence of joint venture arrangements.
In the O’Connell, case Peat Marwick wanted its incentive to reflect part of the profit that would be made on the development project, Mr O’Connor said.
“The incentive was a total of $32 million and $8 million was cash, which was the balance of the fit out,” he said
“They regarded themselves as a partner or joint venturer in the construction.”
How money changed hands also was an issue in more simple lease agreements, where the owner of the building offers a contribution to the fit-out of the building, Mr O’Connor said.
“If works are to be carried out, structural works – divisions and partitions – it’s easier if the lessor just pays them direct, and that way it doesn’t come into the hands of the firm or the individuals,” he said.
“If it’s to be paid to the firm it’s better that it goes into their bank account rather than the individual’s.”
In spite of these issues, Mr O’Connor maintains that, with careful planning, businesses can avoid cash contributions falling into the definition of income.
“I think it’s still possible if it’s structured correctly and the amount can then be treated as capital and not income, he said.
“It would be helpful if lessees advertisements, internal reports and the information provided to partners … were expressed in moderate language rather than in language reflecting that it is exploiting its attractive position as a lease market target.”
An industry spokesperson from the local property sector said the level of incentives in Perth currently ranged from 10 to 20 per cent.
“At the premium end of the market incentives are around 10 per cent,” he said.
“QV1 is around 10 per cent but as buildings become A grade and B grade it can be as much as 20 per cent.
“When we’re saying rent-free period, it’s net rent, there are still outgoings.”
Even in a property market such as Perth where leasing incentives are mainly confined to rent-free periods and fit outs, any offer needs to be carefully considered, according to Burgess Rawson leasing manager John Doyle.
“It is becoming an issue in relation to depreciation and taxation,” Mr Doyle said.
“It’s quite a complicated issue sometimes.
“If there’s a deal with a cash contribution from the owner, the issue arises as to whether the tenant
should be taxed for the contribution.”
To avoid this situation both tenants and owners will usually take the time to carefully structure the agreement, he said.
“One way around this is that tenants say they’re prepared to spend any cash contribution on the fit out and then they can depreciate it,” Mr Doyle said.
“Lease documents seem to have become more and more complicated growing from documents of about 35 pages to 45 and 65 pages these days.”
However, rent-free periods and cash contributions to fit-outs still need to be carefully considered if tenants wish to avoid the impost of income tax.
Whether a cash contribution is considered income or capital is an important issue in major lease negotiations.
In a recent case decided in the Federal Court of Australia, Judge Goldberg decided that an amount of $8,009,000 provided to Peat Mar-wick as part of a lease agreement was considered income.
Robert O’Connor QC recently presented a paper at the Taxation Institute of Australia forum.
Part of this paper looked at lease inducements and the distinction between capital and income receipts.
“In the [Peat Marwick] O’Connell case, it was a big chartered accounting firm and it knew lessors would want to get it in to take out maybe five floors of a new building,” Mr O’Connor said.
“It [the chartered accounting firm] played that fact pretty strongly and they realised all along that this was one of their big advantages.
“So it was decided to structure things in a way that it got a good amount of money.”
He identified a number of issues that played a role in determining whether a cash sum offered as a lease incentive could be considered income or capital.
Issues such as the extent to which big clients exploit their position in the lease market and the incidence of joint venture arrangements.
In the O’Connell, case Peat Marwick wanted its incentive to reflect part of the profit that would be made on the development project, Mr O’Connor said.
“The incentive was a total of $32 million and $8 million was cash, which was the balance of the fit out,” he said
“They regarded themselves as a partner or joint venturer in the construction.”
How money changed hands also was an issue in more simple lease agreements, where the owner of the building offers a contribution to the fit-out of the building, Mr O’Connor said.
“If works are to be carried out, structural works – divisions and partitions – it’s easier if the lessor just pays them direct, and that way it doesn’t come into the hands of the firm or the individuals,” he said.
“If it’s to be paid to the firm it’s better that it goes into their bank account rather than the individual’s.”
In spite of these issues, Mr O’Connor maintains that, with careful planning, businesses can avoid cash contributions falling into the definition of income.
“I think it’s still possible if it’s structured correctly and the amount can then be treated as capital and not income, he said.
“It would be helpful if lessees advertisements, internal reports and the information provided to partners … were expressed in moderate language rather than in language reflecting that it is exploiting its attractive position as a lease market target.”
An industry spokesperson from the local property sector said the level of incentives in Perth currently ranged from 10 to 20 per cent.
“At the premium end of the market incentives are around 10 per cent,” he said.
“QV1 is around 10 per cent but as buildings become A grade and B grade it can be as much as 20 per cent.
“When we’re saying rent-free period, it’s net rent, there are still outgoings.”
Even in a property market such as Perth where leasing incentives are mainly confined to rent-free periods and fit outs, any offer needs to be carefully considered, according to Burgess Rawson leasing manager John Doyle.
“It is becoming an issue in relation to depreciation and taxation,” Mr Doyle said.
“It’s quite a complicated issue sometimes.
“If there’s a deal with a cash contribution from the owner, the issue arises as to whether the tenant
should be taxed for the contribution.”
To avoid this situation both tenants and owners will usually take the time to carefully structure the agreement, he said.
“One way around this is that tenants say they’re prepared to spend any cash contribution on the fit out and then they can depreciate it,” Mr Doyle said.
“Lease documents seem to have become more and more complicated growing from documents of about 35 pages to 45 and 65 pages these days.”
