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Tenants moving out? Upon vacating their commercial premises, whether its by defaulting or cut shorting their lease terms or choosing not to extend their lease periods, an increasing number of tenants vacating premises are leaving all or elements of their fit out in place. |
The good news
Landlords may be able to obtain some tax advantages from these inherited fit outs.
Reversionary depreciation is the adoption by the landlord of the residual value of the fit-out left behind by a tenant. The remaining depreciation attached to those fit outs may 'revert' to the landlord.
The allowances that may be available relate only to works that are eligible under Division 43 Capital Works Deductions.
How does something that you have not paid for become an asset that you can claim in your own tax return?
The assets can be adopted into your tax schedules because they are based upon historical construction cost and can be claimed by the current owner at a particular point in time.
The advantage of these assets is that they depreciate slowly (either at 2.5% or 4% prime cost) and therefore retain a residual value longer.
What items form part of Division 43?
Division 43 Capital Works Deductions generally relate to components of a fit out that cannot be removed easily and tend to be building or structure related. Typical items may include.
* Plasterboard partitions
* Glass partitions
* Set plaster ceilings
* Suspended plasterboard and grid ceilings
* Electrical wiring
* Wall and floor tiling etc.
What about the rest?
Division 40 assets (depreciating assets) such as loose furniture and fittings that were part of an inherited fit out are not claimable by the landlord as the landlord did not incur a cost to acquire these assets.
Some more good news
If attempts to lease premises that include an existing fit out are unsuccessful you may need to demolish the existing fit out to make way for a new tenant's own fit out requirements. The residual value of the demolished Division 43 components can be written off.
Not bad for something you never paid for in the first place.
Examples
Case 1 - Tenant left fit-out behind and landlord continues to claim building allowance (Div 43 deductions)
Tenant A incurred $200,000 on fit-out in 2000, depreciable under Div 43.
They left the premises in 2005. At that point they had claimed a total of $25,000 in 5 years ($200,000 x 2.5% x 5).
After the lease terminates, the remaining construction expenditure pool of $175,000 reverts to the landlord, so the landlord can claim an additional $5,000 p.a. on building allowance, assuming there is a new tenancy.
The landlord may also be able to claim any professional fees as an immediate deduction given it is related to the termination of the lease. If not, they may claim it as a capital loss associated with the termination of the lease (i.e. a lease is a CGT asset).
Case 2 - Tenant left fit-out behind and landlord decided to demolish the fit-out for a new tenant
A variation on Case 1 - Tenant A vacated on 31 July 2005.
The remaining construction expenditure pool of $175,000 reverts to the landlord on 1 August 2005.
A new tenant then enters into a lease agreement requesting the landlord to demolish the old fit-out on 2 August 2005.
The landlord may claim;
• Undeducted construction expenditure - $175,000
• Demolition expenses
• Professional fees - deductible under CGT as it relates to the termination of lease
Note - if there was a period between tenancies when the space was vacant and the landlord was not using the fitout to produce income, as long as the landlord was 'actively marketing' it and intended to use it for income producing purposes, the law allows for temporary cessation of use.
This article is by
Matthew Neville
Napier & Blakeley Pty Ltd
| If you are looking to buy a commercial investment property and are thinking of using a buyers agent to gain more advantages with your purchase, call Prosper Group now on 1300 664 373 or email us on enquiries@prospergroup.com.au |
