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News Bulletin : ADA News Bulletin November 2010
26 NOVEMBER 2010 When you are seeking rented premises for your practice -- whether you are an existing practice or about to set up a new one -- you will probably be offered inducements by landlords to enter into a lease. These inducements, often called 'lease incentives', can include upfront cash payments or non cash incentives, such as a free fit- out of premises, rent free periods, and even the offer of overseas holidays. The question of whether to enter into a new lease agreement is usually viewed from a purely commercial perspective. As a result, dental practices often accept a lease incentive without considering the tax implications. Being aware of the tax impacts and financial outcomes of what is on offer from the lessor will not only provide tax savings and more cash for your practice, but will give an added perspective to your negotiations. WHAT'S ON OFFER? If your practice decides to rent, cash incentives sound great, until you realize you have to pay tax on the amount. For a company, it will be 30% of the amount. On the other hand, a non cash inducement, such as an overseas holiday, is not taxable. Landlords commonly offer rent free periods or rent discounts. Understandably, these are attractive as there is a saving of cash for a period of time -- a very important benefit when you are setting up practice. The bonus is that rent free periods and rent discounts are not taxable. But before you even move into new premises, there is usually a costly fit-out to think about. One option is to ask the landlord to provide the fit-out as a lease incentive. This form of lease incentive is not taxable to you, if the landlord owns the fit-out. As you might imagine, the tax situation is reversed if you own the fit-out -- its cost is taxable to your practice. However, you will receive a depreciation tax deduction over a number of years for the fit-out cost, effectively making the lease incentive non taxable over time. The table summarizes the tax position for different lease inducements: Incentive Taxable Cash amount Yes Rent free period / Rent discount No Overseas holiday No Free fit-out -- Landlord owns fit- out No Free fit-out -- Tenant owns fit-out Yes (depreciation deduction available) 'MAKE GOOD' CLAUSES When you come to move out of the premises, if your lease includes a 'make good' provision you will need to return the premises to their original condition at the end of the lease. When the fit-out is removed, your dental practice is entitled to a tax deduction for the difference between the proceeds (nil) and the recorded written down book value of the fit-out. The cost of the fit-out's removal or demolition forms part of the tax deduction available to your practice. Bearing this in mind, negotiating the smallest make good amount, or even no make good amount, is a worthwhile strategy. RELOCATING COSTS If your dental practice decides to move fittings or reinstall equipment to its new premises, the relocation costs form part of the cost of the equipment and will be depreciated over a period of time, along with the original cost of the fixtures or equipment. Moving into new premises can bring attractive inducements with financial benefits for your practice -- think about these when it's time to negotiate your next lease. Andrew Chen is a Principal at WHK Horwath. He specializes in improving financial and taxation incomes for dental professionals and professional practices. Phone: 02 9619 1626; or email: email@example.com Readers should not act only on the basis of material obtained in this newsletter because the contents are of a general nature and therefore do not take into account each person's individual circumstances and may be liable to misinterpretation. Do not act upon any of the information contained within this article without first obtaining specific advice from a tax advisor. WHK Horwath assumes no obligation to update this publication after it has been issued. Whilst every effort has been made to ensure accuracy, information contained may not be complete, may have changed or may not be relevant to, or appropriate for your circumstances. a lease inducement TAKING practice management Compiled by Andrew Chen
ADA News Bulletin October 2010
ADA News Bulletin December 2010