Income Tax Act 2007

Avoidance and non-market transactions - Market value substituted

GC 5: Leases for inadequate rent

You could also call this:

“Rules for leases with no or low rent when property is used to earn income”

This law applies to leases of real and personal property. It covers situations where you lease property and use it to make money, but you’re not paying any rent or the rent is too low. This can happen with certain types of leases, like when a company leases property, or when you lease to a relative or a related company.

If this happens, the person in charge of taxes (called the Commissioner) will decide what a fair rent should be. They’ll treat it as if you’re paying this fair rent, even if you’re not really paying it. The fair rent is considered to be paid on the dates set in the lease, or daily if there are no set dates.

The law defines a few important terms. A ‘lease’ can be any kind of rental agreement, even a short one. A ‘related company’ is one that’s connected to you, your relatives, or other people involved in the lease. ‘Rent’ includes any money paid for the lease, not just regular rent payments.

There’s one exception to this rule. It doesn’t apply to property covered by subpart DG, which deals with spending related to using certain assets.

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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.

Topics:
Money and consumer rights > Taxes

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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 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(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).