What happens when a tenant leaves a fit-out behind at the end of a lease? - Koste Chartered Quantity Surveyors

Covid-19 has had an unusual impact on many Australian businesses, including the ability to pay rent. While some reprieve was welcomed during the pandemic, financial strains are beginning to appear. The pandemic has encouraged online commerce and corporate work from home environments. Due to these new tendencies, commercial property owners are now feeling the strain. Many owners have encountered tenant desertion, where a renter simply walks away from a lease without paying rent.

While many businesses have abandoned premises ahead to lease expiration, many others are choosing not to renew, leaving property owners with vacant commercial spaces. Obviously, having a renter vacate your commercial property is not ideal, but there is some good news. As the landlord, you may be able to deduct some of the assets left behind through depreciation under the Income Tax Assessment Act 1997. Plant and equipment left behind by a prior tenant have no cost base for the landlord and thus no depreciation advantage. However, capital works can be claimed if your renter does not make good the premises and it is declared abandoned. The landlord retains ownership of these assets, which can be depreciated or written off as a whole.

What is a fit-out?

Tenant abandonment occurs when a tenant vacates the premises, whether at the conclusion of a lease or at any other time prior to the lease’s expiration date, and fails to make good the premises in accordance with the lease’s terms and conditions, resulting in the property being considered abandoned.

What happens to the properties after tenant abandonment, hence the expiration of the lease?

On the expiration of the lease, the tenant’s installations as well as any tenant-owned property will be considered abandoned and will become the property of the landlord.

Other Landlord Options for Fit-Outs

1: Rent the space to a new tenant while keeping the fit-out. The inherited Division 43 deductions can be claimed at a rate of $180,000 x 2.5 percent, or $4,500 per year, by the landlord.

2: Demolish the fit-out to match the market or a new tenant’s requirements. The residual value of the Division 43 Allowances, which is about $4,500 per year x 37 years = $166,500, can be claimed by the landlord as a balancing adjustment. They can also seek the costs of demolishing the fit-out and making good the premises if they have not received any compensation from the tenant for doing so.

Nonetheless, partnering with the most qualified tax depreciation specialist will provide you with the experience and value that you require for your tenant fit-out project. We could be the answer you’ve been looking for! Get in touch with Koste Chartered Quantity Surveyors right away!

View our video about this topic here.