The Government is seeking submissions on a proposal that lease incentives received by tenants in a commercial property be taxable. Submissions close on August 31.
"The proposals represent a further watering down of the proposition that New Zealand doesn't have a capital gains tax - the legislation would deem a capital gain to be taxable," Mr Truman said.
Currently, most tenants could receive a cash incentive payment as a capital receipt which was not regarded as taxable income.
In some cases, the landlord could argue that the payment was a regular cost of doing business and could claim a tax deduction for the payment.
Lease incentives were prevalent due to economic conditions, he said.
"A landlord would rather pay an incentive than drop the rent because of a perceived impact on the value of the property if the rent is reduced.
"Tax considerations are not a huge factor in the deal that is negotiated between landlords and tenants."
The difference in tax treatment between the landlord and the tenant was stated by the IRD to be the main driver for the proposed change, Mr said.
There would be situations where a lease incentive payment was not deductible to a landlord, such as where the landlord only owned one property and the lease was over the entire property. The payment was likely to be viewed as a capital cost.
If the proposals proceeded, Mr Truman advocated a guaranteed deduction available to the landlord.
Care would still need to be taken in structuring lease incentives.
A better tax outcome for a tenant might be to receive a contribution to their capital cost of fit-out because those amounts could be spread as income over 10 years or be deducted off the cost of the assets for depreciation purposes. That might defer the effective tax cost of the benefit.
The proposal continued the trend of IRD moving to close down perceived anomalies when it became aware of them, Mr Truman said.
Law firm Chapman Tripp said the IRD statement summarily reversed a 14-year-old Privy Council decision relating to lease inducement payments.
"Worse, it suggested that it would apply the change immediately - before the new policy has even been introduced into Parliament, let alone enacted."
Partner Casey Plunket said Chapman Tripp viewed the situation as "entirely inappropriate" and reminiscent of then prime minister Rob Muldoon's 1975 announcement that workers could stop paying superannuation contributions before the law permitting that was passed.
"We object very strongly to a purported change of law by the IRD, a member of the Executive branch of Government. Changes to legislation only have effect when Parliament passes an amendment. Until that time, taxpayers are entitled to rely on the law as it is written on the books, not as proposed by the law department."
Mr Muldoon was held to have been in breach of the Bill of Rights 1688 when he attempted that action in 1975.
Key points
• Proposals apply to commercial lease arrangements entered into on or after July 26, 2012.
• Amounts received as an inducement to enter into a lease over land would be taxable.
• Would also apply to a payment made on the assignment of an existing lease where an existing tenant pays another person to take on an existing lease.
• Only applies where there is an income tax deduction available for the rental payments - there it should not apply to private residential properties.
• Non-cash benefits received as a lease incentive, such as help with fit-out costs, would also be taxable.
