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_GlenMarsh1(Newbie)Newbie
27 Sept 2021

I have built an mezzanine office as part of a fitout, we paid for the fitout after we started our lease and we have to remove (make good) when the lease expires (5 year lease). 1. A temporary structure (the mezzanine) that is contracted to be removed in 5 years must be deprecated over 40 years?? : a) can I claim the mezzanine as a asset? I paid for it and I will remove when I leave. 2. Can I claim the office fitout i.e. The desks, chairs, Elecctrical work, carpets, doors, windows painting off the office etc? 3. When I finish The lease and remove the temporary mezzanine that has only been deprecated over 5 out of the 40 years. a). Can I claim the outstanding depreciation? b.) Can I then claim any kind of Deduction. Removing, scraping of metal etc. I still do not understand why I cannot deprecate something that is temporary over the life of the product (until the lease ends).

18,277 views
4 replies
18,277 views
4 replies

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Most helpful reply

JodieR_ATO(Community Support)Community Support
28 Oct 2021

Hi @WendyThrive,


Thank you for your feedback, we've edited the original post for accuracy. Your client, the lessee, can claim depreciation for the term of their lease based on the effective life of the assets. Capital works can be depreciated at a rate of 2.5% - https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-expenses/capital-expenses/work-out-your-capital-works-deductions


However, once the lease ceases, you're correct they're not entitled to this deduction upon disposal of (walking away from) these improvements, but the entitlement to the deduction reverts to the building owner. I have seen an alternative view that a CGT event (A1 or C2, depending on whether the lessor or lessee were deemed to be the owner) arises with an associated capital loss being the remaining un-deducted cost base of the improvements'.


If your client at the end of their lease removes items and remains the owner of these assets, they may need to complete a balancing adjustment based on the termination value of the capital asset. You can also refer to the link from RichATO's response.

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ATO Certified Response
RichATO(Community Support)Community Support
ATO Certified Response28 Sept 2021

Edited by *Moderator* for accuracy. Hi @GlenMarsh1, 1. Capital works improvements are generally depreciated over 40 years. As the lessee and owner of the improvements, you can claim the capital works deductions for the period of your lease. Thereafter, deductions normally revert to the owner of the building. However, as you’ve advised the structure will be removed at the end of your lease, the ability to depreciate the capital asset will cease. At this point you may be able to complete a balancing adjustment for the termination value of the structure. You may wish to speak with a quantity surveyor in relation to this. 2. Yes, you’ll need to apply the same principles to the furniture and fittings for their effective life, if they need to be claimed over a period of time. If you don’t remain the owner at the end of your lease, ownership will revert to the owner of the building. 3. Yes, as advised above. Business expenses may be included under the business section of your return. A similar question has been asked previously on the forum and you may like to read the answer provided by @KylieATO. It contains some additional references.

WendyThrive(Newbie)Registered Tax Professional
8 Oct 2021

I have a similar scenario to GlenMarsh1 above.... I have a client who took out a lease on a premises, spent just under $10k on timber, sheeting, cladding, paint, door hardware and electrical work associated with enclosing an office area, relocating and installing air conditioners, power points and lights to create an office within the premises. After 20 months they have left this premises and moved to a new premises when they have had to do a new fit-out. My understanding previously was that these types of lessee improvements fell under the Division 43 Capital Works provisions, and that if a lessee terminated their lease and does not scrap the office fit-out (which would have resulted in a balancing adjustment deduction under s43-40), they are not entitled to this deduction upon disposal of (walking away from) these improvements, but the entitlement to the deduction reverts to the building owner, which doesn't seem particularly fair if the building owner did not pay for the work. In that scenario, how do we deal with removing the assets from the balance sheet do a balancing adjustment and add it back as non-deductible in the tax reconciliation? I have seen an alternative view that a CGT event (A1 or C2, depending on whether the lessor or lessee were deemed to be the owner) arises with an associated capital loss being the remaining un-deducted cost base of the improvements. Unfortunately this entity is unlikely to have capital gains to offset it against. Your answer above alludes to the fact that the capital works requirements over 40 years "only applies to building owners", and that a lessee of a commercial space is entitled to depreciate the cost of the capital improvement works (the office structure) over the period of the lease, and I assume a balancing adjustment is available at an earlier termination date of the lease. Can you provide me with the section of the legislation, or a tax ruling that supports this position, please?

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