Nov 252014
 

In a previous article, we saw how the tax legislation allows a business tenant to deduct the income element of the premium paid under a short lease. In particular, we found that the deduction is spread over the term of the lease.

This makes sense and has symmetry, though this symmetry is due to the legislation. Under the lease premium rules the landlord is treated as receiving part of the premium as income, so the tenant is treated as having incurred this same amount as an income expense. However, this statement isn’t quite true as we shall find out.

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Property Tax and the Lease Premium Rules – Why is the tenant’s tax relief spread over the lease?

 Property Tax  Comments Off on Property Tax and the Lease Premium Rules – Why is the tenant’s tax relief spread over the lease?
Nov 192014
 

When a landlord grants a tenant a short lease for a premium, part of the latter sum is treated as an income receipt in the hands of the landlord. The tenant is allowed to deduct this income element against his own revenue receipts, the deduction being spread over the length of the lease (we are assuming that the tenant is occupying the property for business purposes).

I know this latter fact because this is one of the topics that I learned about when I attended the courses that my employer sent me on, when I started my tax career. I also know this because I read about it in an article on buying and selling real estate which appeared in one of the various tax magazines.

That article even had the statutory reference for the tenant’s deduction, so that I could feel confident that it was a true statement. But until recently I didn’t have occasion to look too closely at what the legislation said. And when I did look, I found that the answer wasn’t as obvious as I had expected.

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Nov 102014
 

Consider the following scenario, where we have a tenant occupying business premises which it wishes to vacate. The reasons could be various. For example, it has surplus office space, or perhaps the tenant is a big retailer who has discovered its mistake of opening a branch in a dead end part of town and now wants to make a “strategic withdrawal”.

In these circumstances, the tenant may be willing to pay the landlord a sum of money in order to free itself from its obligations under what has become an onerous lease. What are the tax implications of this transaction? In particular, is the tenant’s exit payment tax deductible?

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Lease Premiums – capital or income? – a statutory interlude

 CGT, Income Tax, Property Tax, Statutory Interpretation  Comments Off on Lease Premiums – capital or income? – a statutory interlude
Nov 132013
 

The following is a statutory analysis of the position when a lease of land is granted for a premium. We have already seen how this works in previous articles on the Lease Premium Rules. The first article was about how the rules operate to modify the capital gains treatment of the landlord, and the second article concerned how the landlord could use these rules to his advantage in claiming tax relief for the property.

However, these two articles raise some important questions concerning the nature of the premium and how it is taxed. Why should a landlord receiving a premium be taxed under the capital gains legislation, and a property trader be taxed under the income tax rules? More importantly:

“How does this result come about under the legislation?”

We shall discuss this more fully below. Continue reading »

The Lease Premium Rules Part Two – How can a landlord claim tax relief for the property?

 Property Tax  Comments Off on The Lease Premium Rules Part Two – How can a landlord claim tax relief for the property?
Oct 242013
 

In this article we shall see how the Lease Premium Rules can be used to enable a landlord to claim a tax deduction for part of the purchase price of the property. This can be extremely useful since capital costs cannot in general be set against rental receipts.

It should be noted however, that this is not a “cure-all” – the viability of the method proposed depends on a number of factors, as we shall see below. Continue reading »

Property Tax – The Lease Premium Rules Part One

 Property Tax  Comments Off on Property Tax – The Lease Premium Rules Part One
May 302013
 

When a landlord grants a lease, the tenant may be required to pay a premium in addition to regular rental payments. How is this premium taxed?

In this article we shall find that the answer is by no means a simple one. If the lease is a long lease, the premium is taxed as a capital receipt, but if the lease is a short one, part of this sum is taxed as income.

The meaning of what is long and short, and how much of the premium is taxed, will become clear in the following discourse.

(This article can be downloaded in pdf format at Academia.edu.)

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