Alexandria Commercial Relocation: Make-Good Tax Deductions & Fitout Write-Offs

Taxation Ruling TR 2013/2 provides the primary framework for distinguishing between capital works deductions under Division 43 and repairs deductible under Section 8-1. In the context of an Alexandria lease expiry, commercial tenants are routinely contractually obligated to return premises to 'base building' condition. This process frequently encompasses the removal of industrial racking, demolition of partitioned creative offices, and stripping back of mechanical services. TR 2013/2 establishes that work undertaken to restore an asset to its original state following substantial operational alteration or cumulative dilapidation must be evaluated against the character of the asset as an entirety. If the make-good requires replacing an entire structural component—such as an entire subfloor, dedicated air handling plant, or complete electrical reticulation—the ATO classifies the expenditure as capital in nature rather than an immediate revenue deduction under Section 8-1 [ATO: TR 2013/2]. Furthermore, accounting treatment under AASB 137 requires businesses to recognise a make-good provision on the balance sheet throughout the lease term where an obligation exists. However, for tax purposes, this accounting provision is non-deductible under Section 8-1 until the actual liability crystallises and expenditure is definitively incurred. Aligning your end-of-lease documentation with TR 2013/2 prevents the ATO from recategorising allowable operational restoration costs into non-deductible capital outgoings.

Commercial tenants in Alexandria frequently spend hundreds of thousands of dollars constructing architectural fitouts, industrial mezzanine structures, customer lounges, and technical facilities. These assets are classified as capital works under Division 43 of the ITAA 1997, typically amortised at a statutory rate of 2.5% per annum across a 40-year period. However, commercial leases rarely span four decades. When an Alexandria lease terminates and the premises are vacated, the lingering undeducted construction expenditure—the unamortised capital works balance—can be fully accelerated and written off in that single income year, provided the requirements of Section 43-40 are met [ATO: Section 43-40]. To claim a balancing deduction under Section 43-40, the relevant capital works must be destroyed or demolished. If an incoming tenant or the building owner retains the fitout, the vacating tenant cannot access Section 43-40 because physical destruction has not occurred. This presents a critical tax consideration during lease surrender negotiations: if the outgoing tenant executes a physical demolition as part of their make-good obligations, the entire remaining cost base of the Division 43 assets becomes 100% tax-deductible in the year of demolition. Proper substantiation demands an itemised historical depreciation schedule prepared by a qualified quantity surveyor to verify original construction costs and prevent ATO disputes regarding pre-existing base building components.

While structural fitout components fall under Division 43, freestanding, removable, and mechanical plant assets are governed by Division 40 of the ITAA 1997. In typical Alexandria premises—such as photographic studios, specialty roasters, custom engineering workshops, and design suites—Division 40 assets encompass industrial split systems, bespoke commercial lighting grids, security installations, extraction systems, and modular kitchen facilities. When these assets are permanently stripped out and scrapped at lease termination, a balancing adjustment event occurs under Section 40-295 [ATO: Section 40-295]. The statutory mechanism allows the tenant to immediately deduct the asset’s adjustable value (written-down value) less any termination value received (such as scrap or salvage proceeds) under Section 40-285. To ensure compliance, businesses must avoid the administrative shortcut of pooling plant and equipment into bulk asset registers. Every individual asset stripped from an Alexandria site must have its specific adjustable value calculated as of the exact disposal date. If plant is left behind for an incoming tenant or transferred to the landlord without consideration, Section 40-300 establishes specific market-value substitution rules that can generate unexpected assessable income if not correctly handled in the contract of sale or lease termination deed.

Executing a commercial lease exit deed without prior tax review introduces severe compliance risks and often destroys entitlement to valuable tax deductions. Legal exit deeds are drafted by property lawyers focused exclusively on releasing contractual liabilities; they do not account for your Division 40, Division 43, or Section 40-880 tax posture. Before any Alexandria commercial tenant signs a surrender agreement or make-good settlement, our principal-led practice mandates the execution of a rigorous pre-signing protocol. This structured approach ensures every dollar spent on exit is properly matched with its correct statutory tax treatment under the ITAA 1997.

Managing the tax implications of an Alexandria commercial relocation requires moving past generic compliance and examining the underlying statutory provisions of the ITAA 1997. In our principal-led practice, every lease termination file is reviewed directly by an FCPA to ensure alignment between property contracts, physical strip-out realities, and statutory tax positions.