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Income Tax Act 2007

Avoidance and non-market transactions - Market value substituted

GC 5: Leases for inadequate rent

You could also call this:

“Paying fair rent when leasing a property from family or related companies”

When you lease a property, like a house or a farm, you usually pay rent to the owner. The government has rules to make sure you pay a fair amount of rent. If you do not pay rent, or if you pay too little, the government might decide what a fair rent would be.

You lease a property when you use it but do not own it. This can include renting a house, a farm, or even a car. The government considers a lease to be any agreement where you use something that someone else owns.

If you lease a property from a family member or a company that is related to you, the government might look closely at how much rent you pay. They want to make sure you are paying a fair price. The government also looks at leases between companies and their owners or relatives.

The government decides what a fair rent is, and you have to pay that amount. They consider the rent to be paid on the days you agreed to pay it, or every day if you did not agree on specific days. The owner of the property has to consider the rent as income they earned.

A related company is a company that is connected to you or your family. Rent includes any money you pay to use the property, like a one-time payment when you move in. If the property is something that the government considers to be a special kind of asset, like a farm animal, then different rules might apply, and you can find more information in subpart DG. The government also has rules about partnerships, which you can find in section HG 2.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1517081.

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Part G Avoidance and non-market transactions
Market value substituted

GC 5Leases for inadequate rent

  1. This section applies in relation to leases of real and personal property if and to the extent to which—

  2. a property is leased; and
    1. the lease is 1 of the types referred to in subsection (2); and
      1. the lessee uses the property in deriving income; and
        1. no rent is payable, or the Commissioner considers that the rent is less than adequate.

          1. This section does not apply when the property is an asset to which subpart DG (Expenditure related to use of certain assets) applies.

          2. The following types of leases are subject to this section:

          3. a lease by a company:
            1. a lease by a person to a relative or a related company:
              1. a lease by 2 or more persons to a relative or a related company of any of those persons:
                1. a lease by a partnership, ignoring section HG 2 (Partnerships are transparent), to a relative of a partner or a related company of the partnership.

                  1. The lessee is treated as paying, and the lessor is treated as deriving as income, an adequate rent determined by the Commissioner.

                  2. The adequate rent is treated as—

                  3. paid on the rent payment dates set out in the lease, if any; and
                    1. paid on a daily basis on each day of the lease term, if there are no rent payment dates; and
                      1. income derived by the lessor on the date on which it is treated as being paid; and
                        1. accruing on a daily basis.

                          1. In this section,—

                            lease means a tenancy of any duration, including a sublease or bailment

                              related company means a company that is associated with—

                              1. in the case of a single lessor, the lessor, 1 or more relatives of the lessor, or a combination of them:
                                1. in the case of multiple lessors, including a partnership, any of the lessors, 1 or more relatives of any of the lessors, or a combination of them

                                  rent includes a premium or other consideration for the lease.

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                                  Notes
                                  • Section GC 5(1): amended (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 48(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                  • Section GC 5(1B) heading: inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 59(1) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
                                  • Section GC 5(1B): inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 59(1) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
                                  • Section GC 5(2)(d): amended (with effect on 1 April 2008), on , by section 66(1) (and see section 66(2) for application) of the Taxation (Annual Rates for 2024–25, Emergency Response, and Remedial Measures) Act 2025 (2025 No 9).
                                  • Section GC 5(5) related company: amended, on (applying for the 2010–11 and later income years), by section 245(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                  • Section GC 5 list of defined terms asset: inserted (with effect on 1 April 2013), on , by section 59(2) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).