Leasehold Improvements
8.105. Brief reference is made in Section VIII to leases in general. Here discussion is limited to leasehold improvements carried out by a taxpayer at his own expense in connection with his business activities and for which an allowance, either by way of depreciation or amortisation, is not available. A number of submissions have been received on this point.
8.106. A taxpayer sometimes has no option but to incur costs in erecting buildings on leasehold, and it has been claimed that an allowance should be available which recoups the costs over a reasonable period. Buildings erected at an airport by an airline to service passengers, cargo and aircraft are one example.
8.107. The Ligertwood Committee made a series of recommendations relating to a deduction for part of the cost of
improvements carried out by a lessee on leased property used for the production of assessable income and for the
inclusion of an equivalent sum in the assessable income of the lessor. The effect of these recommendations would have
been to allow the lessee a deduction, spread over the period of the lease subsequent to making the improvements, of an
amount agreed by the parties as being the estimated residual value of the improvements at the end of the term of the
lease. There would have been corresponding inclusions in the assessable income of the lessor. However, that Committee
was mainly concerned with overcoming the abuse of the then provisions of Division 4 of Part III of the Act. The
recommendations of the Ligertwood Committee were not acted upon but the abuses were ended by the
― 98 ―
termination in 1964 of the operation of Division 4 in respect of new improvements. Whatever merit there may have
been in the recommendations of the Ligertwood Committee they do not seem to be appropriate in the context of the
general allowance of depreciation on buildings which this Committee recommends.
8.108. At least when the lessee has erected the building at his own expense on Crown land or on land of a public authority or a body not subject to taxation, it would be reasonable to deem him to be the owner of the building in question and to provide that he should receive the depreciation allowances. However, this approach would exclude any allowance to a lessee where the leasehold improvements have been carried out on privately owned land and accordingly may be thought to be unduly restrictive.
8.109. The Committee recommends that, for the purpose of allowances for depreciation of buildings, a lessee should be deemed to be the owner of any leasehold improvements carried out at his own expense if he uses the property for income-producing purposes. He should be entitled, during the period of his possession as lessee, to allowances to recover the costs he has incurred at the same rate as would apply to equivalent expenditure by the owner. It is not proposed that on his ceasing to have possession as a lessee he should obtain a balancing allowance as to do so would possibly open the way for abuse of the allowance. The treatment of any unrecouped cost for capital gains tax purposes would be a matter of detail of that legislation.