Published: 16 March 2010.

Contributed by Gavin Barnes of Redchip Lawyers

Commercial 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.

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