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Did you know: You could make a capital loss when you terminate a lease agreement?

by , 18 September 2014
Before you enter into a lease agreement for your office space, you must consider the tax implications. If you don't, it could have a significant effect on the tax cost of your business operations later on.

The reason for this is your premise may cost you in some way or another.

Even if you terminate your lease, it can have Capital Gains Tax (CGT) implications. If you don't know what these are, read on to find out...

 

Here are the CGT implications if you terminate your lease agreement

 
The best way to explain your CGT liability in this situation is to give you a practical example, so let's look at what happened to Mr Smith.
 
Mr Smith's the owner of a fast food business, and he carries on its trade as a sole proprietor. On 1 March 2009, he entered into a five year lease for the rental of business premises. Mr Smith improved the premises after getting permission from the landlord. 
 
He spends R200 000 on improvements in year one of his lease.
 
When Mr Smith terminated the lease at the end of the five year, however, there was a Capital Gains Tax implication.
 
Here's why…
 
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This is the CGT implication in Mr Smith's situation

 
Because Mr Smith doesn't own the premises, he doesn't make any profit from it. This means he makes a capital loss of R200 000 which is the money he spent improving the premises. Unfortunately, he can't offset that capital loss against taxable income.
 
He also can't deduct the cost of the improvements for income tax purposes because the improvements don't qualify for a deduction. He can't claim a wear and tear allowance either since he's not the owner.
 
So be warned: If you improve your rented business premises, you could make a capital loss when you terminate the contract. 

PS. Here are three instances where you don't have to pay Capital Gains Tax... And eight other ways to LEGALLY beat the taxman!

 
 

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