Overview
The tax implications of the expenses you incur in repairing or replacing your business premises or fit out, will depend on:
- the type of asset involved, for example, is it a depreciating asset or capital works asset?
- if you repair, improve, or replace
- whether you apply a rollover or use other concessions.
Remember to keep records to show how you calculated any deductions you claim in relation to your damaged or destroyed business premises.
Find more information, see:
Restoring your business premises
If your business premises are damaged or destroyed, the tax implications depend on whether you:
- carry out repairs
- make improvements
- replace it completely.
You can claim a deduction for certain expenses while you carry out this work, including:
- costs associated with the clean-up of your business premises
- rent while you repair and restore your business premises if you have not ceased your business
The cost of demolishing or removing your depreciating assets (such as plant and equipment) will form part of their cost base. The disposal of these assets may result in a balancing adjustment.
Repairing or improving your business premises
You can claim an immediate deduction if you carry out a repair to your business premises.
It is a repair if it, fixes defects, damage or deterioration of your business premises or fit out, for example:
- a like-for-like replacement of part of a wall damaged by a bushfire
- repairing electrical wiring damaged by a flood
- replacing part of the roof damaged in a cyclone.
It is an improvement if:
- the work you carry out involves a substantial reconstruction or the replacement of an entire structure
- you make a substantial improvement to the damaged part of your premises, for example, replacing carpet with ceramic tiles.
Improvements are a capital expense, and you may be eligible for a deduction under the depreciation or capital works rules.
If you carry out work that includes both repairs and improvements to your property, and you:
- can separate the cost of the repairs from the cost of the improvements, you can claim a deduction for the cost of your repairs
- can't separate the repair and improvement, it is treated as an improvement and you won't be entitled to claim an immediate deduction.
For more information, see Claiming a tax deduction for repairs, maintenance and replacement expenses and TR 97/23 Income tax: deductions for repairs.
Example 1: repairing business premises
Patrick owns a factory that was partly destroyed by a flood on 1 April 2022. He received $50,000 in compensation from his insurance company.
Patrick spent $55,000 (excluding GST) to replace part of the wiring and repair the external walls and flooring.
When Patrick lodges his business' tax return, he:
- includes the compensation of $50,000 in his assessable income
- claims a deduction of $55,000 for the expenses he incurred to repair his business premises – as they are not considered a replacement of an entirety.
Example 2: repair versus improvement
Tony owns the building that he uses to operate his retail clothing business. He has not insured the building for flood damage.
After a flood damaged his building, some of the electrical wiring had to be removed as it was unsafe. Tony's electrician advised that the replacement of the wiring should be done in the ceiling of the premises, so it is better protected from future floods.
The front windows and doors were also damaged, some of the single pane glass needed to be replaced. To increase durability, security and energy efficiency, Tony decided to replace all the glass and doors with double glazing and stronger, more damage-resistant units.
Tony incurred the expenditure in the 2022 income year. He is eligible to claim an immediate deduction for the repair of the electrical wiring in his tax return, as it is a repair and not an improvement.
In terms of the windows and doors, because the work goes beyond restoring the glass to its original state, it is considered an improvement. As the windows and doors are part of the building, Tony can claim a capital works deduction. Tony must apportion his deduction if he has not used the new windows and doors for the whole income year.
End of exampleIf your business premises has been destroyed
If your business is completely destroyed or you had to demolish it due to the extent of the damage, and you have been claiming a capital works deduction for your business premises, you can claim:
- capital works deductions for the cost of your replacement business premise
- a deduction for the remaining undeducted amount of the construction cost of your business premises, less any insurance payout you receive or are entitled to receive.
You will make a capital gain if your insurance payout is greater than the undeducted amount of the construction cost. If eligible, you may choose to rollover your capital gains tax (CGT) liability. You may choose to do this if you're incurring expenditure to acquire another CGT asset that is used in your business, such as rebuilding your business premises.
These principles apply to each capital works deduction if you have multiple capital works deductions for the same business premises.
When calculating your deduction, the amount you receive from your insurance payout is reduced if you incur demolition costs in the same income year that the capital works were destroyed.
If you decide to rebuild and incur demolition costs in a different income year in which the capital works was destroyed, the expenses you incur will be added to the cost base of the new building.
Example 3: destruction of an uninsured business premises
Sarah owns a building that she uses to operate a clothing business and has been claiming a capital works deduction.
The building was destroyed by a fire on 25 June 2022. Sarah was not insured and did not receive any compensation for the business premises.
She can claim a deduction for the remaining amount of her construction cost for the building that she has not yet deducted.
Sarah will also have a CGT event on the loss of her building. However, because she didn't receive compensation and has claimed a deduction for the undeducted amount of her construction costs, there is no capital gain or loss from this event.
End of example
Example 4: destruction of an insured business premises
Timothy owns 2 premises next to each other that he uses for his motorcycle repair business (a shopfront and a storage shed). The shopfront was destroyed by a fire on 5 January 2022. The fire also damaged the storage shed used to store parts.
The cost base of the shop front premises was $280,000.
On 1 June 2022, Timothy received an insurance payout of:
- $300,000 for the destroyed shopfront premises, and
- $45,000 for the damage to the storage shed.
On 10 June 2022, Timothy incurred expenses of $45,000 to repair the storage shed.
Timothy decided to use improved materials to construct the shopfront and incurred construction costs of $350,000.
- Money received $300,000
- Cost base $280,000
- Capital Gain $20,000
Timothy made a capital gain of $20,000. However, because he incurred expenditure to replace the shopfront, he may choose to rollover this gain.
If Timothy chooses the rollover, the amount of expenditure he can include in the cost base of the replacement building is reduced by the amount of the capital gain.
In his tax return, Timothy:
- includes $45,000 in his assessable income from the insurance payout received for the damaged storage shed
- can claim a deduction of $45,000 for the repair of the storage shed
- reports that he has elected to rollover the capital gain of $20,000 relating to the shopfront premises.
Once the rebuilding of the shopfront is complete Timothy can claim capital works deductions for the construction costs (reduced by the capital gain).
End of exampleReplacing and repairing the fit out
You can claim an immediate tax deduction for the cost of repairs to the fit out of your business premises, but you can't claim for the cost of improvements.
If you carry out work that includes both repairs and improvements to your property, you can only claim an income tax deduction for the cost of your repairs if you can separate the cost of the repairs from the cost of the improvements.
Examples of repairs include:
- replacing doors of a storage cupboard
- repairing shelving damaged by a flood.
Repairs or improvements
If the work you carry out involves a substantial reconstruction or the replacement of an entire structure, this may be an improvement. You can't claim a deduction for the total cost of improvements to your business premises in the year you incur them.
It is considered an improvement if it makes an aspect of the property better, more valuable, or changes the character of an item.
Improvement means work that:
- provides something new
- generally, increases the income-producing ability or expected life of the property
- goes beyond restoring the efficient functioning of the property.
If what you do to your damaged fit out is an improvement, its cost may be claimed as a deduction over time under either:
- capital works rules where it is a structural improvement
- capital allowances rules where the item is a depreciating asset.
If you hire a builder or other professionals to carry out these works for you, we recommend you ask for an itemised invoice to help work out your claim.
Repair or improvement scenarios
For more information on different repair and improvement scenarios, see:
- Fit out was destroyed and replaced
- Destroyed or lost fit out was a capital works asset
- Fit out is a depreciating asset
- Fit out forms part of your small business pool
- If you claimed an instant asset write-off
Fit out was destroyed and replaced
If the fit out of your business premises has been lost in, or destroyed by a disaster, the tax implications will depend on the type of fit out you have installed, and whether you have claimed deductions for it using the:
Depending on your circumstances, you may be entitled to a deduction for the loss of the fit out. If you received an insurance payout to cover the loss, there are additional consequences you need consider.
You will be entitled to claim deductions for the replacement fit out under either the capital works rules or the depreciation rules depending on whether the replacement is a capital work or an ordinary depreciating asset.
If your replacement asset is an eligible depreciating asset, you may be able to take advantage of temporary depreciation incentives.
Destroyed or lost fit out was a capital works asset
A fit out is generally a capital works asset if it was permanently fixed to, or otherwise part of, a building or a structural improvement.
If your fit out is a capital works asset and it is destroyed, you can claim a deduction for your undeducted construction cost if:
- you receive no insurance payout, or
- your insurance payout (in respect of the destroyed fit out) is less than the undeducted construction cost.
If your insurance payout (in respect of the destroyed fit out) is greater than the undeducted amount of your construction costs, you will normally make a capital gain. If you make a capital gain and replace your destroyed fit out, you may be able to rollover your capital gain.
Example 5: claiming deductions for a destroyed fit out that is a capital work
Tony operates a retail clothing business and uses the simplified depreciation rules. On 1 July 2017, Tony installed new counters and display cabinets that were fixed to the structure of the building. He is eligible to claim a capital works deduction for these assets at 2.5% in the 2017–18 income year and future years.
Tony's business premises was destroyed by a flood in March 2022. Tony did not have insurance and did not receive any compensation for the loss of his assets. Tony can claim a deduction for any undeducted construction expenditure on his destroyed shop fit out in his 2021–2022 business tax return.
End of example
Example 6: deduction for installing moveable fittings
Tony decides to continue his retail clothing business and to install shop fittings that are more flexible and moveable.
On 1 June 2029, Tony purchases a new store counter and display tables on wheels. The new shop fit out is not fixed to the building structure and can be easily moved if there's another flood.
The store counter and display tables are depreciating assets. As Tony uses simplified deprecation, the assets are added to the small business pool. Tony can claim a deduction for 15% of the assets cost in the first year and 30% in future years.
End of exampleFit out is a depreciating asset
If your fit out is a depreciating asset subject to the general depreciation rules, a balancing adjustment event will occur when it is destroyed as a result of a disaster. You need to calculate a balancing adjustment amount to include in your assessable income or claim as a deduction.
If you:
- did not receive an insurance payout for the fit out, you can claim a deduction for the remainder of its depreciation amount
- received an insurance payout that results in an amount being included in your assessable income and replace the destroyed fit out, you can elect to rollover a balancing adjustment amount that would otherwise be included in your assessable income. This will reduce the amount the deductions you can claim for the replacement fit out.
Fit out forms part of your small business pool
If you are eligible to use the simplified depreciation rules, and the fit out formed part of the small business pool, you need to apply the asset disposal rules on the disposal of the damaged or destroyed fit out, and include any insurance payout you receive that is attributable to the asset in its termination value.
If you claimed an instant asset write-off
If you are eligible to use the simplified depreciation rules for the fit out, and you claimed an instant asset write-off deduction (including temporary fully expensing), you need to include any insurance payout you receive that is attributable to the asset in your assessable income.
Deductions related to the cost of holding land
If your business premises or structures on your land are destroyed by a disaster, you may temporarily stop using the land they were on following the natural disaster.
If you were eligible to claim deductions for the holding cost of that land prior to the natural disaster, you may be able to continue to claim deductions for the cost of holding that land under the exceptional circumstances exemption to the vacant land rules.
You can claim deductions for up to 3 years from the time the business premises on the land were destroyed if you intend to rebuild and use that land in your business again. You may request an extension to the 3 year period if you are unable to rebuild your business premises in that time for reasons beyond your control.
This exemption also applies where a natural disaster impacts farmland, for example, where structures such as fences on land used in primary production, silos or woolsheds have been damaged or destroyed.
What you need to know if your business premises have been damaged or destroyed by a disaster.