When a tenant's fit-out becomes the landlord's asset
In commercial leasing, tenants often invest heavily in fitting out their premises — partitions, lighting, kitchens, bathroom facilities, floor coverings, and sometimes entire office or retail environments. When the tenant vacates, what happens to that fit-out has significant tax implications for the landlord.
Three common outcomes when a tenant vacates
1. The fit-out is removed by the tenant Some leases require the tenant to "make good" — restoring the premises to their original condition. If the tenant removes their fit-out, it leaves with them. The landlord has no new assets to claim, but may have make-good payments received from the tenant (which have their own tax treatment).
2. The fit-out is abandoned by the tenant (and stays) If the tenant leaves the fit-out behind and the landlord takes ownership, the landlord acquires new depreciating assets. These assets can be depreciated under Division 40, at their market value at the time of acquisition.
3. The landlord strips the abandoned fit-out If the landlord removes and disposes of the inherited fit-out (because they want to re-let or refurbish), the remaining value of those assets can potentially be written off (scrapped).
Claiming depreciation on inherited tenant fit-out
When you acquire a commercial tenant's abandoned fit-out, you can generally claim Division 40 depreciation on the assets. The opening value is typically the market value of the assets at the date of acquisition (not the tenant's original cost).
The second-hand asset restriction for residential property (post-2017) does not apply to commercial property. Commercial landlords can claim Division 40 on second-hand commercial fit-out.
Tax treatment of make-good payments
If the tenant pays a make-good amount to the landlord instead of physically restoring the premises:
- If you actually spend the money on reinstatement work, the cost enters the depreciation schedule
- If you keep the make-good payment as income without spending it on reinstatement, it is assessable income in the year received
Getting the tax treatment right
The interaction of inherited fit-out, make-good payments, and subsequent refurbishment is a complex area. A quantity surveyor can assess the market value of inherited assets and assist with the correct classification for your depreciation schedule.