Lease Surrender Payments

Lease surrender payment

As a landlord, if you wish to terminate a lease prematurely before it expires, you may try to encourage the tenant to agree by offering them a lease surrender payment. Alternatively, your tenant may pay you a lease surrender payment as compensation to you for terminating the lease early. If you own the property as an investor, the lease surrender payment you make to a tenant is generally not tax deductible and is simply added to the cost base of the property for future capital gains tax (CGT) purposes.

However, if you incur the lease surrender payment in the course of carrying on a business (eg you carry on a business of leasing multiple properties) or in connection with ceasing to carry on a business, you may write off the lease surrender payment at 20% per year over five years, rather than include it in the cost base of the property, provided that the payment is for the purpose of terminating a lease and is not made for entering into a new lease with the same tenant under similar terms.

On the other hand, if you receive a lease surrender payment from your tenant, the payment will either be assessed as income or as a capital gain to you.

If you are a passive property investor, the payment will likely be a capital gain, which may potentially qualify for the CGT discount. If you own the property in the course of carrying on a business, the lease surrender payment will be assessable income in your hands.

Small-business CGT concessions If you own a commercial property at which you carry on an active business, you may be entitled to the small-business CGT concessions if you sell the property, even if the business has been carried on by a related entity of yours that does not directly own the property.

The suite of small-business CGT concessions is extremely powerful, and includes the 15-year exemption, the 50% active asset reduction (in addition to any applicable 50% CGT discount), retirement exemption, and small-business replacement asset rollover. Using one or more of these concessions in conjunction may substantially reduce or even eliminate any taxable capital gain on the sale of a property.

To access the concessions, there are a number of qualifying conditions to consider. Given the tax attractiveness of these concessions, professional advice is highly recommended as the tax office regularly reviews and audits arrangements that have applied the concessions, as part of its tax compliance program.