AASB 16 sublease accounting: How subleasing works for Australian and NZ companies
Under AASB 16 and NZ IFRS 16, an intermediate lessor must classify a sublease by reference to the right-of-use asset from the head lease, not the underlying asset. Here is what that means in practice.
Three floors in a Sydney CBD tower. The professional services firm pays rent on all three to the building owner, and collects rent on one from a smaller firm on the floor below. Straightforward enough commercially. Under AASB 16, though, that second arrangement doesn't just sit quietly in the accounts. It creates two accounting obligations running in parallel. The firm is a lessee on all three floors, carrying a right-of-use (ROU) asset and lease liability on the balance sheet. And on the floor it subleases, it is also a lessor, with classification and measurement obligations most finance teams don't realise they have until an auditor raises it. The classification of that sublease (whether a finance lease or an operating lease) changes what appears on the balance sheet in a material way.
Updated August 2026.
What is an AASB 16 sublease?
Under AASB 16 (and its international equivalent IFRS 16), a sublease is a transaction in which a lessee re-leases an asset, or part of it, to a third party while the original head lease between the head lessor and lessee remains in effect. The lessee who enters into the sublease is referred to as the intermediate lessor. The third party is the sublessee. Under AASB 16, the intermediate lessor accounts for both the head lease and the sublease as two separate contracts, applying lessee accounting to the first and lessor accounting to the second.
For Australian reporters, AASB 16 is substantively identical to IFRS 16 for both lessee and lessor accounting. The paragraph numbers and requirements are the same. New Zealand reporters follow NZ IFRS 16, which carries the same requirements. References to AASB 16 in this guide apply equally to NZ IFRS 16 and IFRS 16.
Subleases arise in a range of common situations. A tenant who leases more office space than it needs and sublets part to another business. A logistics company that holds a long-term warehouse lease but assigns some of the floor space to a third-party operator. A retailer whose head office lease has three years remaining but who leaves early and finds a subtenant to cover the remaining term. All of these create the same accounting question: how do we treat the sublease on our books?
Back to our Sydney firm. It holds a head lease over three floors with eight years remaining. It subleases one floor to a smaller firm. That arrangement puts the professional services firm in the position of intermediate lessor for that one floor, with an obligation to account for the sublease under the lessor accounting requirements of AASB 16 paragraphs 61 to 97.
The classification decision: finance lease or operating lease
Here is where the standard surprises people. Most finance controllers, when they first encounter sublease accounting, reach for the underlying asset as the reference point: the building, the warehouse, the equipment. AASB 16 doesn't let them. The standard is explicit: an intermediate lessor must classify the sublease by reference to the ROU asset arising from the head lease, not the underlying physical asset. It's a meaningful distinction, and getting it wrong changes the classification in the majority of real-world cases.
Under AASB 16 paragraph B58, a sublease is classified by reference to the right-of-use asset from the head lease, not the underlying asset (for example, the building itself). This is the opposite of the approach under US GAAP (ASC 842), where classification looks to the underlying asset. The practical effect is that more subleases are likely to be classified as finance leases under AASB 16 and IFRS 16 than under ASC 842, because the ROU asset has a shorter life than the building.
There are two additional rules to know before applying the general classification test. First, if the head lease was accounted for using the short-term lease practical expedient (i.e. the head lease had a term of 12 months or less at commencement), the sublease must be classified as an operating lease. Second, if an entity subleases, or plans to sublease, an asset, it can no longer designate the low-value asset exemption for that head lease. Both of these rules remove the two simplification exemptions from any portfolio that involves subleasing.
For all other subleases, the classification follows the general lessor test: does the sublease transfer substantially all the risks and rewards incidental to ownership of the ROU asset? In practice, the most reliable indicator is the sublease term relative to the remaining head lease term. The following table summarises how to approach the classification.
| Classification criterion | Finance lease | Operating lease |
|---|---|---|
| Sublease term vs. remaining head lease term | Covers substantially all of the remaining ROU asset term | Covers only a portion of the remaining ROU asset term |
| Transfer of risks and rewards | Substantially all risks and rewards of the ROU asset transferred to sublessee | Risks and rewards retained by the intermediate lessor |
| Head lease practical expedient | Not applicable (short-term head lease must be operating) | Mandatory if head lease was accounted as short-term |
Applying this to the Sydney scenario: the head lease has eight years remaining. If the sublease of one floor is for seven or more of those eight years, it almost certainly transfers substantially all the risks and rewards of that portion of the ROU asset, and would be classified as a finance lease. If the sublease is for three years out of the remaining eight, it's an operating lease. The contractual term is the starting point; the full picture of risks and rewards (including purchase options, variable payments, and residual value guarantees) then determines the final call.
What changes on the balance sheet
The difference between the two outcomes is substantial: not just in the numbers, but in the structure of what appears on the balance sheet.
Finance sublease. The intermediate lessor derecognises the portion of the ROU asset that has been transferred to the sublessee and recognises a finance lease receivable in its place, measured at the net investment in the sublease (the present value of future sublease payments). In the Sydney example, if one floor out of three has been sublet on a finance sublease, the firm derecognises roughly one-third of the total ROU asset and recognises a finance lease receivable for that floor. It still holds two-thirds of the original ROU asset on the balance sheet for the floors it occupies. The difference between the carrying amount of the derecognised ROU asset and the initial carrying amount of the finance lease receivable flows to the P&L as a gain or loss on the sublease.
Operating sublease. The ROU asset remains on the balance sheet in full (all three floors) and continues to depreciate over its original useful life. The intermediate lessor recognises sublease income on a straight-line basis (or another systematic basis, if more representative) over the sublease term. There is no receivable, no derecognition of the ROU asset, and no gain or loss at commencement. The head lease liability also remains unchanged in both cases: the intermediate lessor continues to account for it as a lessee regardless of how the sublease is classified.
How the head lease and sublease interact in the financial statements
This is where the dual-sided nature of subleasing creates reporting complexity. The intermediate lessor holds both positions simultaneously, and they appear as separate line items in the financial statements.
On the lessee side, the full head lease continues to generate a lease liability (disclosed in the lessee maturity analysis), depreciation on the ROU asset, and interest expense on the liability. That accounting doesn't change because of the sublease; the obligation to the head lessor is unchanged.
On the lessor side, the sublease generates either a finance lease receivable (with interest income recognised over the term) or operating lease income (recognised straight-line). Both appear in the income statement, but in different lines and with different patterns. The interaction matters for disclosure: AASB 16 requires the intermediate lessor to present the income statement effect of both positions clearly, and the notes must separately address the lessee and lessor disclosure requirements. For a deeper look at what those lessee disclosures require, see our guide to IFRS 16 disclosure requirements for lessees.
One practical issue: the discount rate for the finance sublease. If the interest rate implicit in the sublease can't be readily determined (which is common where the sublease was negotiated on market terms rather than as a structured financing), AASB 16 permits the intermediate lessor to use the discount rate applied to the head lease (adjusted for any initial direct costs of the sublease) as a proxy. This simplification is worth knowing, because constructing an implicit rate for a short sublease can otherwise be disproportionately complex.
Disclosure requirements for subleases under AASB 16
Subleases generate disclosure obligations that sit on top of, not instead of, the standard lessee disclosures. Finance teams sometimes assume that sublessor disclosures substitute for or simplify lessee disclosures. They don't. An intermediate lessor must satisfy both.
As a lessor, the intermediate lessor must disclose:
- Sublease income for the period (separately from other rental income, where material)
- For finance subleases: the maturity analysis of undiscounted future sublease receivables, showing amounts due in year one, years two to five, and beyond five years
- For finance subleases: a reconciliation of the undiscounted lease payments to the net investment in the lease
- For operating subleases: the maturity analysis of undiscounted future lease payments to be received
- Any significant judgements used in classifying the sublease, particularly where the term was close to the threshold for finance lease classification
The lessee disclosures for the head lease remain in full: ROU asset movements, lease liability maturity analysis, short-term and low-value exemptions (noting that the low-value exemption is no longer available for subleased assets), interest expense, and depreciation. Auditors will check that the sublessor disclosures are consistent with the lessee disclosures and that the same head lease appears correctly on both sides of the notes. For a guide to how AASB 16 audit reviews are typically structured, see IFRS 16 and AASB 16 in practice: The 6 compliance areas auditors focus on.
What your lease accounting system needs to handle
Many lease accounting platforms are built for lessee accounting. They're designed to automate AASB 16 calculations for the obligations a company holds as a tenant or equipment lessee, and they do that well. But subleasing requires the system to handle the lessor side too, and not all platforms do.
In practice, an intermediate lessor needs a system that can:
- Record the head lease as a lessee (ROU asset, lease liability, amortisation schedule) and track it across modifications and reassessments
- Record the sublease as a lessor (operating sublease income or finance lease receivable), linked to the relevant portion of the head lease ROU asset
- Produce the maturity analysis and reconciliation disclosures required for both positions
- Generate audit-ready documentation that demonstrates how the sublease was classified and why
If your portfolio includes subleases (even one), it's worth confirming with your current vendor how they handle the lessor side. A system that processes only one direction won't complete the picture, and the gap will show up in the notes, or in the audit. For a self-check on your overall AASB 16 compliance position, the AASB 16 / NZ IFRS 16 compliance self-assessment guide covers the areas most commonly flagged in reviews.
Frequently asked questions about AASB 16 subleasing
Why do intermediate lessors classify subleases by reference to the ROU asset and not the building itself?
Under AASB 16 and IFRS 16, the intermediate lessor's interest is the right-of-use asset, not the underlying building or equipment. The ROU asset has a defined life equal to the head lease term. Classifying by reference to the ROU asset (rather than the building's economic life) means a sublease that covers most of the remaining head lease term will almost always be a finance lease, because the sublessee is effectively taking on substantially all of the ROU asset's remaining value. The IASB chose this approach specifically for intermediate lessors, and it differs from the ASC 842 approach used in the United States.
If we sublease only part of a floor, do we still need to apply AASB 16 lessor accounting?
Yes. Subleasing part of a leased asset creates the same accounting obligations as subleasing the whole. The intermediate lessor must assess whether the sublease of that part constitutes a separate lease component, classify it as a finance or operating lease by reference to the ROU asset for that portion, and apply the relevant lessor accounting. The proportion of the ROU asset associated with the subleased area is what's assessed against the sublease term for classification purposes.
Does the head lease liability change when we enter into a sublease?
No. The head lease liability is not affected by the existence of a sublease. The intermediate lessor remains fully obligated to the head lessor under the terms of the head lease, regardless of whether a sublessee is paying rent. The sublease is accounted for separately, on the lessor side. The head lease liability and associated ROU asset (for the portion not derecognised on a finance sublease) continue to amortise as they would without any sublease in place.
Can we use the low-value asset exemption on the head lease if we sublease the asset?
No. Under AASB 16 paragraph B7, if a lessee subleases an asset, or expects to sublease it, the head lease does not qualify for the low-value asset exemption. This rule applies even if the underlying asset would otherwise meet the low-value criteria (typically assets with an initial value of around USD 5,000 or less when new). If subleasing occurs, the head lease must be recognised on the balance sheet as a full ROU asset and lease liability.
What discount rate should we use to measure the net investment in a finance sublease?
The preferred rate is the interest rate implicit in the sublease. If that rate can't be readily determined (which is common for market-rate commercial subleases where no explicit financing structure exists), AASB 16 permits the intermediate lessor to use the discount rate applied to the head lease, adjusted for any initial direct costs associated with the sublease. This makes the discount rate practically obtainable in most cases without a complex derivation exercise.
Does your lease accounting system handle both sides?
Subleasing arrangements add complexity that standard lessee-only platforms may not cover. If your portfolio includes head leases and subleases, LOIS is built to handle both: lessee accounting, lessor accounting, and the disclosures that connect them.
Explore LOIS lease accounting