Lease Fit Out Costs and Division 40…

The two questions here are:

1. For various items included in a fit out, can a taxpayer claim a deduction under Division 40?

2. If they can claim a deduction under Division 40 what is the effective life?

3. If they cannot claim a deduction under Division 40 can they claim a deduction under Division 43?

Interestingly, the Commissioner has issued a series of private rulings in this area. In Private Ruling 79966 the lease agreements for the lease of various stores in shopping centres were for a period of between two and seven years. At the end of each lease period, the lessor and the entity enter into negotiations regarding the re-lease of the store. One of the requirements of the renegotiations is to refit the store. The Commissioner states that a deduction was available under Division 40 for the following items: Floors including carpets and vinyl that can be removed without damage, Signage and wall panelling, Cabinets that can be removed without damage, Security, Computer systems, Graphics, Plasmas and Phone systems. As these items are clearly removable from the premises at the expiry of the lease the Commissioner concludes the items are plant to which Division 40 applies. However, the Commissioner concludes that other items such as roller shutters, internal doors, shade cloth, sails and ceiling batt insulation are in general an integral part of a building and so would not be plant under the ordinary meaning. Therefore, unless they can be classified as plant under the extended definition (for example a motor for the roller shutter would be considered as machinery and therefore plant), it is unlikely that a deduction for a decline in value for these items would be allowed under Division 40.

Other items of a lease fit out that the Commissioner has accepted are able to be depreciated under Division 40 include (see Private Ruling 1011433712630): Air conditioning assets (excluding ducting, pipes and vents), Carpets in commercial office buildings, Curtains and drapes, Fire control and alarm assets, Floor coverings (including vinyl that can be removed without damage), Workstations, Lighting control system (microprocessor based), Lighting system (fluorescent), Generators and Window blinds used in commercial buildings.

In relation to the question of effective life the Commissioner states that the effective life of these depreciating assets held is the term of the lease or the time between refits whichever is applicable. Subsection 40-105(2) states “If, in working out the period, you conclude that the asset would be likely be scrapped, sold for no more than scrap value or abandoned before the end of that period, its effective life ends at the earlier time”. In this case, the depreciable assets in the main need to be replaced or scrapped at the time of a new fit out or ultimately at the end of the lease period. Therefore the taxpayer can self assess the effective life as being either the term of the lease or the time between fit outs, whichever is applicable.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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