Leasehold improvements are an important part of any business operation. But how can business owners maximise the cash return from them? The simple answer is through leasehold improvements depreciation.
What are leasehold improvements?
Leasehold improvements are the improvements made by a lessee, or tenant, to customise a rental property. This is common in the commercial landscape as a tenant often needs to make changes to the property to best match its business operations. Tenants can claim depreciation on their leasehold improvements over the given asset’s depreciable lifetime.
Some common examples of leasehold improvements include updating cabinetry and storage, changing flooring or adding new walls within a building.
What aren’t leasehold improvements?
Repairs and maintenance are not classed as leasehold improvements. For example, if a business tenant patched a crack in a wall or had their kitchen appliances serviced, they wouldn’t be classed as improvements.
Expenses related to repair and maintenance can be claimed as an immediate tax deduction in the same financial year. All the owner needs to do is keep record of the expense and their accountant will factor it into their lodgement come tax time.
What is depreciation?
Depreciation is the natural wear and tear of property and assets over time. Business owners and commercial investors alike can claim depreciation as a tax deduction each financial year.
The best thing about depreciation is that unlike other tax deductions, no additional money needs to be spent to claim it. This is because depreciation is a natural process that can be claimed once the asset starts being used to produce income.
Why is it important to claim leasehold improvements depreciation?
Failing to claim depreciation on leasehold improvements essentially means throwing money down the drain.
The depreciation claimed can make a big impact to the amount of tax the business can claim. Sometimes, this depreciation can reach the tens of thousands of dollars in a single year, resulting in a tax refund rather than a substantial tax bill.
How to claim leasehold improvements depreciation?
A tax depreciation schedule is necessary to claiming maximum depreciation on any leasehold improvements.
This schedule will outline the depreciation of all assets owned by the business, not just the areas where improvements have been made.
If the business already has a depreciation schedule, they can simply request an update to the current schedule once an improvement is made. BMT offers this service to all their existing clients at a small fee.
What happens if the lessee removes their current fit-out to make leasehold improvements?
Commercial leases can span for several years, so it’s only natural for the business to make improvements over time.
The good news is that any undeducted depreciable value on removed assets can be claimed as an instant deduction. This is possible through a process called scrapping but it’s essential to have a tax depreciation schedule prepared prior to the removal to claim the scrapped value with full compliance.
BMT Tax Depreciation has been specialising in commercial and residential depreciation for over twenty years. The team applies industry-specific legislation to ensure all commercial owners and business claim depreciation to its full potential, while maintaining full Australian Taxation Office compliance.
Businesses that are planning on making leasehold improvements can call BMT today on 1300 728 726 or Request a Quote for an obligation-free depreciation estimate of the changes.