Depreciation on a commercial lease fit-out is a valuable tax deduction that can significantly reduce your business's taxable income. Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment used in the fit-out, such as air conditioning, lighting, and office furniture. Division 43 allows for deductions on capital works, which include structural improvements like walls and ceilings.
The most common misconception is that only property owners can claim these deductions. However, tenants who have incurred expenses on fit-outs can also claim depreciation, provided they hold the appropriate leasehold improvements and the fit-out is used for income-generating purposes.
To see how this plays out in practice, consider a scenario where a business owner leases a retail space and spends $150,000 on a fit-out, including $50,000 on plant and equipment and $100,000 on building improvements. The plant and equipment can be depreciated over their effective life as per the ATO's guidelines, while the building improvements can be claimed at 2.5% per annum under Division 43. Assuming a 30% tax rate, the first-year depreciation claim could be around $5,000 for plant and equipment and $2,500 for capital works, reducing the tax bill by $2,250.
In our experience reviewing thousands of properties across Australia, many business owners overlook the opportunity to claim depreciation on fit-outs, especially when they are leasing. Often, they either don't realise they can claim or they underestimate the value of the deductions. Another frequent issue is not maintaining proper documentation, which is crucial for substantiating claims with the ATO.
The answer can differ depending on your situation. For instance, if the fit-out was completed before 1987, it may not qualify for capital works deductions under Division 43. Additionally, if the fit-out is part of a shared space, the claimable amount may need to be apportioned. For properties acquired after 9 May 2017, the ability to claim on second-hand plant and equipment is restricted.
Given the complexities involved, it's advisable to seek professional advice. A Chartered Quantity Surveyor can identify all depreciable items and calculate the optimal depreciation schedule, while an accountant can ensure these deductions are integrated into your tax strategy effectively.