The days of low vacancy rates and high rents are drawing to a close for commercial property owners. Lease incentives like office fitouts are increasing in popularity as landlords compete for tenants. Fit-out incentives, when correctly drawn up, provide tax benefits for both landlords and tenants. The tax benefits from fitout incentives depend on the ownership of the fitout.

Free fitouts, owned by landlords, are usually tax-free for tenants. Landlords can also claim depreciation deductions with respect to office furniture and other equipment included in the office fitouts. Tenants can also claim depreciation deductions in a similar way when the free office fitout is owned by the tenants. It is also important to carefully design the fitout agreements to maximise tax benefits.

Office Fitout: Bonus Tax Deductions

On February 3, 2009, The Federal Treasurer announced a temporary business tax break as part of the Federal Government’s Stimulus Package. On February 25, 2009, an Exposure Draft of Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 was released for public comment. Its purpose was to introduce a bonus tax deduction. Taxpayers who acquired an eligible asset or spent capital on existing equipment or office furniture between December 12, 2008, and before June 30, 2009, and had such equipment on site, ready for use by June 30, 2010, would be eligible for a bonus tax deduction of 30%of the cost of the asset. This is in addition to the normal depreciation deductions of the office furniture and equipment.

Hence, the total deductions that can be claimed are up to 130% of the cost of the eligible asset. The bonus tax deduction is applicable to assets under Division 40 of the Income Tax Assessment Act 1997 (ITAA1997) of the Parliament of Australia. These assets include carpets, office furniture, and other office fitouts. However, office fitouts like building works are not eligible for bonus tax deductions.

Who can Claim Bonus Tax Deductions?

Division 40 of the ITAA 97 provides a framework for determining who can claim the depreciation deductions of the office furniture and fitouts. The leasing agreement determines whether it is the landlord or the tenant who is entitled to claim depreciation deductions. These rules also apply to the bonus tax deductions. In additions, the office fitouts, furniture and equipments must cost $1,000 or more for small business entities, and $10,000 or more for other business.

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