Kmart, a national supermarket retailer, recently received a lease incentive package from Eastfield shopping mall to become a tenant in a new shopping mall.
The incentive package comprised a $40,000 payment to compensate Kmart for surrendering the lease at their current location and a first month tenancy rent-free (saving Kmart $30,000).
Advise Kmart on the tax treatment of these lease incentives?
Lease surrender payment of $40,000
A lease surrender payment is assessable income and tax under the ordinary income provision, ITAA 97 s 6-5(1), because it is an ordinary incident of business activity, even though it may be an unusual or extraordinary transaction.
Although s 6-5(1) is found not to apply, the payment may be assessable as a profit or gain from an isolated business transaction and taxed under ITAA97 s15-15(1). (see TR 2005/6)
First Month tenancy rent-free
The rent-free incentive is a non-cash benefit that is not convertible into cash. Given that Kmart would qualify for a tax deduction had Kmart paid the rent. The otherwise deductible rule applies and the taxing provision for non-cash business benefits (ITAA36 s21A) does not apply. Therefore, the rent-free saving of $30,000 is tax-free.