Many taxpayers choose to lease business premises to operate from rather than buy the premises outright. In some cases, this may be because taxpayers are unable to afford the significant costs associated with the outright acquisition of business premises. Alternatively, leasing (rather than the acquisition) of business premises may represent a more cost-effective option.
The leasing of business premises will result in specific tax issues for lessors and lessees, some of which are considered in this segment of the notes. In particular, the notes consider:
- the key tax consequences for lessees who incur expenses on leasehold improvements;
- the deductibility of lease surrender payments;
- the deductibility of lease payments following the cessation of a business; and
- the dangers for lessors under the Personal Properties Securities Act (‘PPSA’).
All legislative references in this segment are to the ITAA 1997, unless otherwise indicated.
Key tax consequences for lessees who incur expenses on leasehold improvements
A ‘leasehold improvement’ broadly refers to a capital improvement (or alteration) made to leased premises either at the commencement of a lease, during the term of a lease or on the termination of a lease. While the focus of this segment is on leasehold improvements made by a lessee, it should be noted that these may also be made by a lessor.
The tax consequences of leasehold improvements vary depending on the type of capital improvements (or alterations) that have been made to leased premises. In this regard, leasehold improvements generally fall under one of two categories (i.e., depreciating assets or capital works), with different tax consequences applying to each of these categories.