Tax Cuts For Fast Fitouts

Commercial property landlords and tenants could get a handout from the Federal Government in the form of a bonus 30 per cent tax deduction for new office fitouts — but they will need to be quick.

Draft legislation for a temporary business tax break as part of the Government’s stimulus package stipulates that fit-out contracts must be signed before June 30. The fit-out must be installed and ready for use by June 30 next year.

Landlords are increasingly using the offer of a fit-out as an incentive to lure tenants, as vacancy rates increase and tenants once more have some choice.

The 30 per cent bonus tax deduction is on top of normal depreciation deductions of 100 per cent over the life of an asset. Therefore, a taxpayer may be able to claim deductions of up to a whopping 130 per cent of the cost of the asset.

Under the proposed legislation, those who miss the June 30 deadline but teeup a fit-out before December 31 this year, and have it ready for use by December 31 next year, will receive a lesser bonus tax deduction of 10 per cent.

David Stavropoulos, a partner with law firm Deacons, said the 30 per cent tax deduction, in the context of the 30 per cent company tax rate, would effectively amount to a 9 per cent reduction in the price of any goods acquired.

“So if you spent $100,000 for example, you would get $9000 off your tax bill at the end of the year,” he said.

Fit-outs can include some assets that a landlord or tenant can depreciate, including carpets, appliances, light fittings, furniture, blinds, curtains, air-conditioning, ventilation systems, lifts, fire alarms and sprinkler systems.

They can also include the removal of walls or structural improvements.

But capital works, such as building works, will not qualify for the deduction. The assets must cost $1000 or more for small businesses and $10,000 or more for other businesses.

Landlords seeking new tenants should keep the bonus tax deduction in mind when negotiating any lease incentives, Mr Stavropoulos said. He said although the legislation had not yet been passed, landlords were taking the chance that it would do so.

“I think if businesses are going to do a fit-out, they may as well take the punt and do it before June 30,” he said. “But they really need to make sure the tax tail doesn’t wag the dog.”

In this financial climate, businesses would need to ensure they could afford to pay for the fit-out or get finance for it.

“And how useful is the 9 per cent price reduction if they have to wait until their tax return is lodged to get the benefit … which might be 12 months away,” Mr Stavropoulos said.

If they waited until after June 30, some might be able to negotiate a price reduction of even more than 9 per cent, given that the economy was in bad shape.

However, some suppliers were offering customers the chance to pay 91 per cent of the purchase price now and the balance when they received the 9 per cent benefit after their tax return was lodged.

Fit-outs owned by landlords are generally tax-free for tenants.

Fit-outs undertaken by tenants are generally assessed for tax but they may be able to claim depreciation deductions in a similar way to landlords.