Lease incentives have become a standard bargaining chip in the competitive Australian commercial property market. Whether you are fitting out an office in Sydney’s CBD or negotiating rent for a suburban retail shop in Brisbane, understanding the legal and taxation rules around incentives is critical.
This guide, written by our commercial lease lawyer, explains lease incentives, highlights key legislative requirements, and offers practical drafting and negotiation tips for both landlords and tenants.
Key Takeaways
- Lease incentives are legally enforceable benefits offered to secure or extend a commercial lease
- Common incentives include rent-free periods, cash payments, fit-out contributions and rent reductions
- Incentives must be disclosed in retail leases under State and Territory legislation
- Incentives are generally assessable income for tenants and may trigger GST and stamp duty
- Precise drafting, including clawback clauses, protects both parties if the lease ends early
- Misleading disclosure can breach s 18 Australian Consumer Law, attracting significant penalties
What Are Lease Incentives?
Lease incentives are concessions or benefits provided by a landlord to encourage a tenant to enter into, or renew, a commercial lease. Incentives arise because landlords compete for quality tenants and seek to minimise vacancy periods.
Common Types of Lease Incentives
- Rent-free or rent-discount periods
- Landlord contributions to the tenant’s fit-out (often coupled with lease make good obligations)
- Cash payments on commencement
- Landlord undertaking tenant-specific works (e.g. additional air-conditioning)
- Marketing or relocation allowances
Why Landlords Offer Lease Incentives
- Attract high-calibre tenants in a soft market
- Reduce effective vacancy costs
- Allow landlords to maintain the face rent, supporting property valuations
- Enable tenants to allocate capital towards business growth rather than upfront occupancy costs
Legal Framework Governing Lease Incentives in Australia
Federal Taxation Rules
Issue | Legislative Source | Practical Effect |
Assessable income for tenants | s 6-5, s 15-2 Income Tax Assessment Act 1997 (Cth) | Cash or non-cash incentives are assessable either at receipt or spread over lease term, depending on structure and ATO guidance |
GST treatment | A New Tax System (GST) Act 1999 (Cth) | Supply of incentives may be a taxable supply; ensure tax invoices and creditable purpose apportionment |
Deductibility of fit-out | Div 40 and Div 43 ITAA 1997 | Tenants may claim depreciation or capital works deductions on landlord-funded fit-out |
Retail Leasing Disclosure Obligations by State
Jurisdiction | Key Provision | Disclosure Requirement |
NSW | Retail Leases Act 1994 (NSW), s 11(1)(d) | Incentives disclosed in Lessor’s Disclosure Statement |
Victoria | Retail Leases Act 2003 (Vic), s 17 | Written disclosure of incentives to prospective tenants |
Queensland | Retail Shop Leases Act 1994 (Qld), s 21C | Must disclose monetary and non-monetary incentives |
SA, Tasmania, ACT | Respective retail lease legislation | Similar mandated disclosure in disclosure statements |
Conveyancing and Formality Requirements
- s 54A Conveyancing Act 1919 (NSW) requires agreements concerning land, including incentive deeds, to be in writing
- Similar common law writing requirements apply nationally to avoid evidentiary disputes
Stamp Duty Implications
Some States (e.g. NSW) impose duty on written incentive deeds when linked to dutiable property – check revenue rulings and threshold exemptions.
Key Case Law
Lease incentives encouraging signing of lease
In Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11, the court found that incentives offered during lease negotiations can give rise to a binding collateral contract, provided that:
the incentive promise is intended to induce entry into the main contract (e.g. a lease);
it is separate and independent from the terms of the lease; and
the usual elements of contract formation (offer, acceptance, consideration, intention) are met.
Repayment of lease incentives
In 148 Brunswick Street Pty Ltd v Strategix Training Group Pty Ltd [2021] QDC 38, the lessor and lessee entered into a deed of variation to their lease agreement. This deed included the following incentives:
A six-month rent-free period
A $50,000 contribution towards the tenant’s fit-out
Reduced rent for the remaining lease term
Additionally, the deed granted the tenant an option to terminate the lease early, on the condition that the tenant would repay the value of the incentives received.
When the tenant exercised this early termination right, the landlord sought to recover the incentives, arguing that the repayment clause was enforceable. The tenant contended that this clause constituted a penalty and was therefore unenforceable.
The Court found that the lessee had a real prospect of defending the claim.
Drafting and Negotiating Incentive Deeds
Heads of Agreement
- Record the headline incentive as early as possible
- Clarify whether incentives are conditional (e.g. subject to planning approvals)
Documenting the Incentive
- Use a standalone Incentive Deed or an Incentive Schedule within the lease
- Specify timing of payments, GST, and who can claim input tax credits
- Identify any landlord works and performance standards
Clawback Clauses: Managing Early Termination Risk
- Pro-rata repayment triggers on assignment, early termination, default or breach
- Set clear repayment formulas (e.g. amortised over the initial term)
- Register the Incentive Deed or include a notation on the lease to protect enforcement rights
Avoiding Misleading or Deceptive Conduct
- Cross-check disclosure statements against the final lease and Incentive Deed
- Ensure marketing material matches the agreed incentive
- Maintain written evidence of all negotiations and revisions
Our commercial lease lawyers can help you draft and negotiate this.
Practical Tips for Landlords and Tenants
Landlords
- Conduct cost–benefit analysis: compare incentive value to expected rental income
- Factor GST and stamp duty into initial budgeting
- Register securities or bank guarantees to secure clawback rights
Tenants
- Confirm tax impact: obtain accounting advice on timing of assessable income
- Verify that landlord contributions cover fit-out scope and quality
- Monitor critical dates – unclaimed incentives may lapse
Learn more about leasing a business premises in our guide.
Frequently Asked Questions
Are lease incentives taxable for tenants?
Yes. Under s 6-5 and s 15-2 ITAA 1997, cash and non-cash incentives are generally assessable income, although timing can vary.
Do landlords pay GST on rent-free periods?
A rent-free period does not trigger GST as no consideration is provided. However, any cash or fit-out contributions will usually attract GST.
Must incentives be disclosed in every commercial lease?
Statutory disclosure is mandatory for retail leases in all States and Territories. While not strictly required for non-retail leases, best practice is full written disclosure.
What happens to an incentive if the lease is assigned?
This depends on the Incentive Deed. Many deeds require repayment or landlord consent before assignment, so check any clawback clause.
Can a landlord claim stamp duty back on an incentive deed?
No. Duty is a transaction cost. However, landlords can usually factor it into the incentive’s overall value during negotiations.
Is a verbal promise of an incentive enforceable?
Rarely. s 54A Conveyancing Act 1919 (NSW) and similar rules require agreements concerning land to be in writing for enforceability.
How long should incentive repayment obligations last?
Typically they match the length of the initial lease term, but parties can negotiate shorter clawback periods.
