FIT-OUT INCENTIVES: WHAT ARE THE TAX BENEFITS?

Tenants are enjoying attractive lease proposals from landlords desperate to have
their premises occupied during these tough economic times. Landlords are offering
various incentives in both monetary and non-monetary forms.

Fit-out incentives are increasingly common. So how do they work and what are the
tax implications?.

What is a fit-out incentive?

A fit-out incentive is a landlord contributing to the whole or portion of a tenant’s

costs in fitting out premises in readiness for occupation of the premises by the
tenant. Premises may already have a suitable fit-out in place when the tenant takes
possession. However if not, a tenant will require a suitable fit-out to suit his business
needs. Fit-out works are carried out subject to the consent of the landlord.

What are the tax benefits?

Treatments of tax benefits vary according to who ultimately owns the fit-out when
the fit-out is completed.

If the fit-out exists at the time the tenant takes possession and the fit-out is the
property of the landlord, there is no immediate tax deduction available to the
landlord for the existing fit-out. However, a landlord may claim depreciation on the
capital works over the life of the fit-out. For the tenant, obviously there will be no
tax benefit as it has not paid for the fit-out, nor does it own the fit-out.

In relation to GST, as the landlord owns the fit-out, there are no GST consequences
as the supply of the fit-out is part of the supply of the premises by the landlord to
the tenant.

If the landlord makes a cash contribution to the tenant’s fit-out and the tenant is the
owner of the fit-out, then the landlord is entitled to claim the cash contribution made
to the tenant’s fit-out as a tax deductable expense The tenant may claim
depreciation on the fit-out capital works over the life of the fit-out because the
tenant is the owner of that fit-out.

There are some GST consequences in these circumstances. Where a landlord

provides a cash contribution to fit-out works, the tenant will be making a taxable
supply by entering into the lease which contains the provision for a cash contribution
and therefore the GST component of that cash contribution must be remitted by the
tenant to the Australian Taxation Office. In those circumstances, the landlord is
entitled to claim an input credit for that GST.
How to ensure you get the benefits?

The landlord and tenant must ensure that the legal agreement to lease or the fit-out
agreement properly reflects the intentions of the parties in order to achieve the
desired tax outcome. The key issues to consider will be determining who pays for
the fit-out and who will own the fit-out once it is completed.

Before entering into any such agreements, the parties should each seek taxation
advice from their accountants. The documentation can then be structured to achieve
the desired tax and GST outcome.

For more information

Contact Lucas Hewlett at redchip lawyers on 07 3852 5055 or email

lucash@redchip.com.au

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