Tenant Abandonment and Division 43 Capital Allowances for Commercial Landlords in NSW
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What Is Tenant Abandonment?
When a tenant abandons your commercial property, it can feel like a loss. But there is a tax benefit you may not know about: you may inherit the tenant’s Division 43 Capital Allowances under the Income Tax Assessment Act 1997, potentially unlocking significant deductions.
Division 43 Capital Allowances are tax deductions available for the construction costs of income-producing buildings and structural improvements. When a tenant abandons a fit-out, beneficial ownership of those works transfers to you as landlord — along with the right to claim the remaining allowances.
CLS Legal has been advising commercial landlords in NSW since 2010.
Tenant abandonment occurs when a tenant vacates a premises — either at the end of a lease or before it expires — without making good the property in accordance with the lease terms.
At that point, all tenant installations and tenant property are treated as abandoned and become the property of the landlord. With that transfer of ownership comes the transfer of the Division 43 Capital Works deductions.
Your Two Options as Landlord
Once you inherit the Division 43 Capital Works, you have two choices:
- Continue claiming the balance of allowances at an annual rate of 2.5% of the original construction cost.
- Claim the remaining value as a balancing adjustment, where you carry out partial or full demolition of the fit-out to release the property to a new tenant.
Worked Example
The fit-out cost: A tenant installs a fit-out in a retail or commercial property at a cost of $500,000.
The Division 43 component: The Division 43 portion — internal partitions, hard floor finishes, and elements of electrical, mechanical, and hydraulic services — is approximately $300,000, or 60% of the total capital cost.
What you cannot claim: As landlord, you generally cannot claim deductions for Division 40 components, which include workstations and furniture.
After four years, the tenant relinquishes the lease, vacates the premises, and abandons the fit-out. Beneficial ownership reverts to you.
Option 1 — Lease the Premises to a New Tenant With the Existing Fit-Out
You continue to claim the inherited Division 43 deductions at the following rate:
$300,000 x 2.5% = $7,500 per annum
Option 2 — Demolish the Fit-Out to Meet a New Tenant’s Requirements
You claim the residual value of the Division 43 allowances as a balancing adjustment:
$7,500 per annum x 36 remaining years = $270,000
In addition, provided you have not received a make-good payment from the outgoing tenant, you can also claim the costs you incur to demolish the fit-out and restore the premises.
Not sure which option is right for your situation? Call CLS Legal on (02) 9279 0919 — we can help you understand the tax and legal implications before you commit to a direction.
Tenant Abandonment
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Contact
- Suite 6.05, Level 6, 12 O'Connell Street, Sydney
- info@clslegal.com.au
- (02) 9279 0919
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Legal Advice for Commercial Landlords
Our commercial property lawyers assist landlords with:
- Reviewing your lease to determine make-good obligations and what constitutes abandonment
- Advising on the tax and legal implications of inherited Division 43 allowances
- Negotiating with outgoing tenants over fit-out, make-good, and outstanding obligations
- Preparing or reviewing new leases to protect your position if a future tenant defaults
When a tenant walks away from your property, acting quickly and correctly protects your interests — both legally and financially. Understanding your Division 43 entitlements is one part of that picture.
Call (02) 9279 0919 or request a consultation.
