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Is capital expenditure incurred in restoring leased premises to the condition they were in at the beginning of the lease deductible under paragraph 40-880(1)(g) of the Income Tax Assessment Act 1997 (ITAA 1997), where the expenditure was incurred upon the cessation of the business conducted from the premises?

Yes. Capital expenditure incurred in restoring leased premises to the condition that they were in at the beginning of the lease is deductible under paragraph 40-880(1)(g) of the ITAA 1997 provided the other requirements of section 40-880 of the ITAA 1997 are satisfied.

A partnership operated a shop out of leased premises. Expenditure was incurred to fit out the shop. The fit out involved the tiling of the floor and walls.

At the end of the lease period, the taxpayer incurred further expenditure to demolish the fit out, including the removal of the tiling. This was done to return the premises to their original state as required under the lease agreement. The termination of the lease was an integral element of the cessation of the business and occurred contemporaneously with the cessation.

Paragraph 40-880(1)(g) of the ITAA 1997 allows a deduction for amounts of capital expenditure incurred that are costs to stop carrying on your business, to the extent that the business was carried on for a taxable purpose.

The Explanatory Memorandum accompanying Taxation Law Amendment Act (No. 5) 2002 (TLAA No. 5) refers to site rectification costs and costs associated with the removal of tenant's fixtures incurred upon the cessation of business as examples of costs that may come within paragraph 40-880(1)(g) of the ITAA 1997.

The termination of the lease was an integral element in the cessation of the business and occurred contemporaneously with its cessation. Therefore the capital expenditure incurred to restore the premises to their original condition, as required by the lease, will be a cost to stop carrying on a business.

A deduction will be available for this expenditure where the other requirements of section 40-880 of the ITAA 1997 are also met. The deduction is claimed over 5 years, with 20 percent of the expenditure deductible in the year it is incurred and in each of the next 4 income years under (subsection 40-880(2) of the ITAA 1997).