The key is making sure that your retail premises are contemporary, stylish and fitted out to a standard that exceeds the expectations of your customer base. As tastes change, you may want to periodically give your stores a facelift, which is likely to require a substantial investment of capital. So, how can the taxman help ease the pain?
The good news is that almost everything you spend to improve your store’s appearance will be tax deductible in some way, either immediately or over a period of time. So, here’s my guide to the tax breaks you can enjoy when you refurbish your store.
If the individual in business purchases the equipment with equity or borrowed funds then ownership of the subject equipment vests in the purchaser from the date of the contract of sale.
The income tax consequences are that:
- interest on any monies used to finance the refurbishment
- borrowing costs relating to any loans taken out (such as arrangement fees)
- repairs to fix defects to the property (including repainting doors, walls and windows) and
- the decline in value of any new capital assets bought for the premises
are all deductible to the extent that the asset is used in earning assessable income.
Financing the refurbishment
If you borrow money to finance the refurbishment of your premises, interest paid on that finance will generally be tax deductible, provided all the borrowed funds are used for business purposes (you’ll need to apportion the interest if some of the finance is used for private or domestic purposes).
Loan payments consist of two elements:
- the repayment of the principal, which is a capital expense and not deductible and;
- the interest element (cost of finance) which will be deductible where the loan is for business purposes.
Interest is deductible immediately even where the borrowed funds are used to acquire capital assets, such as property or plant.
Costs incurred in arranging a borrowing are also deductible by the business, as are costs incurred in discharging a loan. That might include:
- loan procurement fees
- guarantee fees
- legal costs
- stamp duty
- valuation fees
- survey fees
- underwriter’s fees
No deduction is available if the finance doesn’t go ahead.
In many cases, you’ll want to raise finance to acquire new assets to use in the business, such as retail fit out equipment (which could include everything from shelves and racking to music systems and POS equipment), or new IT systems. In some cases, you’ll borrow money to acquire the asset from a bank or other financial institution (in which case, the borrowings are dealt with as above) and in others, you’ll lease the asset.
There are different ways to lease an asset. The distinctions between buying an asset using HP, taking out a finance lease and taking out an operating lease can be quite subtle but the tax treatments – and the legal obligations and responsibilities imposed on your business – can be very different, depending on which route you take.
Hire Purchase contracts
If your business acquires assets under a hire purchase contract, you will acquire full legal ownership of the assets, subject to any security on the asset put in place by the lender.
For tax purposes, the following deductions for assets financed under a HP contract can be claimed:
- the interest component of the HP payments
- depreciation (or immediate write-off, see below) on the asset from the date of the HP contract
If your business takes out a finance lease on an asset, your business will take on many of the risks and rewards of ownership of the asset without – initially at least – taking on legal ownership. Typically, after paying the lease payments for the duration of the term, your business will legally acquire the asset by paying out the residual payment to the lessor. Until that point, the entity leasing the asset to your business will be the legal owner.
For tax purposes, lease payments made under a finance lease are immediately deductible. In addition, as your business will be responsible for keeping the asset in good order, any repair or servicing costs will also be tax deductible. Your business can’t claim the depreciation on the asset – the entity leasing the asset to you will claim that.
If your business takes out an operating lease on an asset, it is basically renting that asset from the leasing entity, which retains ownership of the asset.
In many cases, that can be an attractive option. Because the risk of ownership remain with the entity renting the asset to your business, you avoid any of the risks of obsolescence and don’t have to worry about maintaining the asset or repairing it if it breaks down, since the lessor is usually responsible for all those costs.
For tax purposes, payments made under an operating lease are immediately deductible in the period to which they relate provided the asset being leased is used in the business. As noted above, servicing and repairs will often be included in the headline rental cost but if charged separately, they will also be deductible.
If you buy new equipment for your store, you may be able to take advantage of the instant asset write-off to secure an immediate tax deduction for your purchases.
Assets costing up to $30,000 can now be written off immediately provided the turnover of your business is less than $50 million.
Amongst the items you could look at claiming are the following:
- Cash registers and other POS devices
- Store fittings and fixtures
- Computers, laptops and tablets
- In store security systems
If the any individual item costs more than $30,000, the instant asset write-off is not available. Instead, the cost of the item must be written off (“depreciated”) over a period of years.
If you’re not buying a new asset but instead you’re simply refurbishing existing assets, the cost is immediately deductible as a repair. This could cover items as varied as:
- Painting the walls, windows or doors of your premises
- Fixing a defective roof or ceiling
- Returning non-functioning machinery (like a cash register) to full use
- Fixing broken or defective shelving
- Fixing broken heating or air-conditioning systems (though note that replacing existing heating or air-conditioning with completely new units will be capital purchases, dealt with as new equipment, see above).
Goods and Services Tax (GST)
You can claim back the GST charged by providers of services (such as painters and shopfitters) and equipment. The invoices supplied will include GST and an input tax credit will be available. The GST included in the purchase price will need to be included in your next GST return, provided you’ve been given a tax invoice by the supplier (which is a legal obligation where the value of the supply is greater than $82.50).
TIP: Avoid cash payments to tradies who agree to a discounted price provided the job is “off the books” The tradie might do the job for less, but the discount is financed by avoiding GST, meaning you won’t get a tax invoice and won’t be able to reclaim the input tax.
Mark Chapman is tax communications director at H & R Block