Home' Australian Pharmacist : Australian Pharmacist April 2013 Contents 76 Australian Pharmacist April 2013 I ©Pharmaceutical Society of Australia Ltd.
BUSINESS AND INDUSTRY NEWS
The following examples have been adapted
from examples contained in tax ruling
TR 2007/9, which show when expenditure
on leasehold improvements is for
depreciating assets or capital works.
1. Alterations to a themed restaurant:
A hotel has decorated one of its bar areas
with sporting memorabilia from a particular
sport to assist in creating the atmosphere
that is marketed to the public to encourage
patronage. Some items have been securely
fastened to the walls and floors to prevent
theft while others are suspended from
the ceiling. In the circumstances the
Commissioner considers that these items
do not form part of the premises and retain
their separate identity as articles. The items
retain their separate visual identity and
do not add to the completeness of the
premises. These factors outweigh the
differing degrees of attachment of the
memorabilia and any intention that they
might remain in place for an indefinite
period of time. Since these articles fall
within the extended meaning of plant in
subsection 45-40(1) it is not necessary to
consider the relationship of the items to
the hotel business, although in this case the
items are likely to have a function that is
so related to the hotel business to warrant
being held to come within the ordinary
meaning of plant.
2. Redecorating a pharmacy: Capital works
A pharmacy has redecorated in order to
stay abreast of the current display trends.
This included painting the walls in a soft
pastel colour and adding matching ceramic
tiles. The purpose of the restyling is to
provide customers with an impression
of exclusiveness. While the paint and the
ceramic tiles attached to the walls do
contribute to the atmosphere of the store,
they form part of the premises. The tiles
and paint lose their separate identity, are
permanently attached and add to the
completeness of the building. These factors
outweigh any intention to replace the tiles
and paint in response to changes in fashion.
They are therefore not plant.
When is a person taken to 'hold' a
leasehold improvement where they
do not own the building?
Having distinguished between whether
expenditure on leasehold improvements
Tax treatment of leasehold
By Paul Carrazzo
Paul Carrazzo is a practising CPA, a
Financial Planning Specialist (FPS)
and is the principal of the Melbourne
based financial services group, Carrazzo
Consulting. Website: www.carrazzo.com.au
It is obvious to any consumer that competition between pharmacies has
never been more intense, especially with the entry of discount chains in the
past 10 years.
It is often the
'look' and layout
of the pharmacy
that attracts the
consumer in such
a cluttered market
and this has led to
amount of costly
store 'makeovers' by owners and lessees.
Accordingly, I am going to comment on the
tax ins and outs of incurring improvements
as I'm sure many readers will find this
topical and relevant.
What are leasehold improvements?
It is quite common for alterations or
improvements to be made to leased
premises, either by the lessor (i.e. the
landlord) or the lessee (i.e. the tenant).
Broadly, property law differentiates
leasehold improvements between those
that are 'chattels' -- assets that are not
attached to the land, and 'fixtures' - assets
that are attached to the land.
A fixture is generally considered to be
owned by the same person that owns the
land (i.e. the landlord), since it is attached
to the land. Hence, if a tenant attaches
an asset to leased premises, that asset is
normally regarded as a fixture and therefore
will be legally the property of the landlord
-- especially if the asset cannot be removed
from the land once it is attached.
Nevertheless, the tax treatment of leasehold
improvements does not necessarily follow
property law, especially when it comes to
determining which taxpayer, the lessor or
the lessee, gets to claim a deduction and at
what rate. Further, expenditure for repairs
(that is, not capital expenditure) to premises
or depreciating assets will broadly qualify
for immediate deduction under a specific
section of the Tax Act.
Depreciating assets or
Answering this question is relevant
in determining the calculation of any
deduction. The rate of deduction will
differ according to whether the item or
improvements is for a depreciating asset or
Any item that is considered plant can be
written-down based on its effective life.
Of relevance to pharmacists, 'plant' is
defined in the Tax Act to include articles,
machinery, and also extends to plumbing
fixtures and fittings (including floor and wall
tiles) provided mainly for employees.
Capital works (often referred to as a
'building write-o ')
However, the above plant depreciation
rules do not apply to capital works, these
being written-off under another section of
the Tax Act.
Broadly speaking, this section provides a
deduction for 'construction expenditure'
on capital works (including buildings)
if such construction commenced after
19 July 1982. The basic rate of deduction is
generally 2.5% of the capital expenditure.
To avoid a double deductions scenario,
construction expenditure specifically
excludes expenditure on plant.
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