A common problem, which is, or may be about to be experienced by many commercial landlords, are issues associated with tenants relinquishing their leases, vacating the property and abandoning their fit-outs.
Whilst this situation is obviously not ideal for a landlord, in today’s uncertain economic climate there are opportunities available. Landlords may inherit the tenants abandoned Division 43 Capital Allowances. This can result in significant tax deductions for the landlord.
What Is Tenant Abandonment?
Tenant abandonment occurs when a tenant vacates the premises either at the end of the lease or at any other time prior and does not make good the premises in accordance with the lease.
All items of tenant’s installations and tenant’s property will be considered abandoned and will become the property of the landlord.
In this situation the ownership of the Capital Works, Division 43, component of the tenants fit-out reverts to the landlord, who can continue to claim the balance of the Division 43 allowances based on an annual claim of 2.5% of the original construction cost. Alternatively the landlord can claim the remaining value as a balancing adjustment should they carry partial or full demolition of the fit-out in order to entice a new tenant to take up the vacant space.
Example A tenant incurs a capital cost of $300,000 to install a fit-out within a commercial/retail property. The Division 43 components of the fit-out primarily consist of:
- Internal partitions.
- Hard floor finishes.
- Elements of electrical, mechanical & hydraulic services.
The value (based on construction cost) of these Division 43 components is approximately $180,000 or 60% of the capital cost incurred by the tenant. (It should be noted that the landlord generally cannot claim deductions for the balance of the capital cost relating to Division 40 components such as workstations, furniture and fittings etc.) After three years the tenant relinquishes their lease and vacates the premises abandoning the fit-out. The beneficial ownership of the fit-out reverts to the landlord. The landlord has two primary options available to them.
Option 1 – Lease out the premises with the fit-out intact to a new tenant The landlord can continue to claim the inherited Division 43 deductions at the rate $180,000 x 2.5% or $4,500 per annum.
Option 2 – Demolish the fit-out to meet the requirements of the market or a new tenant. The landlord can claim the residual value of the Division 43 Allowances as a balancing adjustment which is approximately $4,500 p.a x 37 years = $166,500. In addition, provided they have not received a consideration from the tenant to make good, they can also claim the costs they have incurred to demolish the fit-out and make good the premises.
How Can Mitchell Brandtman Help a Landlord Identify & Claim Capital Allowances Resulting From a Tenant Abandoning their Fit-out ?
Mitchell Brandtman can:
• Review all existing documentation relating to the fit-out.
• Visit the site to gain a comprehensive understanding of the fit-out.
• Measure & provide an estimate of the historical construction cost of the Division 43 assets.
• Provide a photographic record of the fit-out including all plant and equipment.
• Prepare a Capital Allowance Schedule reflecting the Capital Expenditure incurred by the tenant. • Calculate the value of the balancing adjustments resulting from the demolition of the fit-out.
