Tax Depreciation Deductions Leasehold Improvements

Tax Depreciation Deductions for Leasehold Improvements

As a tenant – when you do work to the leasehold commercial property you are renting – you may be able to claim the expenses incurred as tax deductions.

Read on for more information

What is a Leasehold Improvement?

Leasehold improvements can be either take the form of capital works (division 43) or plant and equipment (division 40) expenses and are carried out by the leaseholder in a commercial investment property.
Typically, the leaseholder is required to remove any leashold improvements they make upon termination of their lease agreement.

A good example of this is a large warehouse I inspected in Rocklea, Brisbane. The tenant had installed a large washdown bay for his truck fleet. Upon the end of the tenancy period, the landlord requried the tenant to pay for the removal of the washdown pits, drainage and pumping equipment.

Who pays for Leashold improvements?

The tenant (leaseholder) pays for the improvements, virtually everytime. It is rare for the lanlord to agree to pay for the leasehold improvements, unless it is done as a means of attracting a particular tenant.

Generally, only a property owner is entitled to claim Capital Works deductions (division 43)

Under sections 43-120 and 43-125 of the ITAA 1997, the lessee can claim deductions for capital
Works costs they have incurred while leasing the property.

Deduction rates on eligible division 43 items is either 2.5% pa or 4% pa depending on the individual property circumstances
Such as:

  • Date construction began
  • Type of construction
  • How the items are used by the tenant/customers

But do not worry about these technicalities. I have prepared tax depreciation schedules for hundreds of tenants leasing commercial property. Often they are also the owner (but under a different entity).

i will ensure your deductions are fully maximised for the most tax advantageous outcome

Tenancy Fitouts can yield significant tax deductions – if handled correctly by the Accountant and Quantity Surveyor

Non-Capital Works Deductions

Items that are not considered Capital works items may qualify as Plant and Equipment items (division 40).
These items are claimable at higher annual percentage rates than Capital Works.

Anywhere between 3% pa and 100% instant write-off

Here’s a few examples I’ve personally seen when onsite Inspecting commercial leasehold properties

    • Gantry cranes
    • Air conditioning
    • TV’s for customer use
    • Dust extraction fan systems
    • Loose furniture for customer use
    • Washdown bay pumps and motors
    • Cooking equipment (fast food stores)

And so on…

Note: For a more detailed breakdown on the differences between division 40 and division 43 this article may help.

Taxation Ruling: TR 2007/9 has more information on what the Commissioner’s view is on the circumstances where plant and equipment can be claimed by the lessee as a tax deduction.

Properties which have lots of tax deductions for tenants

In my experience, the commercial rental properties which deliver the most tax deductions for the tenant (lessee) are cafes, restaurants, fast food outlets and real estate agencies.

But this does not mean other properties are not worthwhile getting a tax depreciation schedule prepared.

No, it Just means these ones almost always have a lot of money invested into them by the tenant to mark it as appealing to customers as possible.

Tax Deductions for WIWO Business Purchases

When purchasing a going-concern it may only be for the business, stock and assets but not the premises.

This is typical of a chain store fast food outlet like Red Rooster. Which I’ve done countless tax depreciation schedules for.
In that case you can’t claim any deductions for the building costs. But you can claim tax deductions for the assets you purchased as part of the business deal.

Sticking with the Red Rooster theme:

  • Chook ovens
  • Microwaves
  • Chip fryers
  • Exhaust extractor fans
  • Cold rooms
  • POS
  • Counters
  • Furniture
  • Fridges and freezers (but not the 3rd party provided ones like the Pepsi branded ones)

…these are all plant and equipment items the lessee-tenant/business owner can claim as tax deductions.

Should the lessee also install capital works items after purchase, then these items can also be claimed.

For example:
Some stores like to install shade cloth sun protection over outdoor seating areas. Or raised decking and balustrades to create an ambience for diners.These are all claimable at 2.5% pa as Capital Works deductions.

So a $50,000 deck and shade sail setup can be claimed back at $1,250/yr
That’s $50,000 x 2.5% = $1,250

When Should You Get a Tax Depreciation Schedule as a Commercial Tenant

It comes down to how much you – as the tenant – spend on the operation of your business.
If you have to spend $15,000+ to fitout the premises for staff or customer use then it’s a good idea to engage a qualified quantity surveyor such as us at WRCQS to assess your business.

And remember; if it’s not worthwhile doing we’ll let you know before you spend a cent.

How to find out more

When you need to save some tax it’s always best to talk to an Accountant who really knows investment property tax laws.

That’s because one of the first things they’ll do is send you the contact details of a Quantity Surveyor who really knows investment property tax depreciation rules.

At WRCQS we are that person. We will happily assist you in determining if you should get a tax depreciation schedule for your tenancy – or not

Simply get in touch with us here to find remove all doubt

And if you’d like to deep dive and get skilled up on all things tax depreciation related, this page will answer a lot of questions you didn’t even know you had

Or to visit our home page for Brisbane tax depreciation services click here

This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying

Published January 2023