IRAS have published the following update pertaining to reinstatement costs (expenses incurred to reinstate premises to its original condition prior to vacating it at the end of the tenancy agreement) on 13 August 2015.
Reinstatement Costs (expenses incurred to reinstate premises to its original condition prior to vacating it at the end of the tenancy agreement)
Generally, reinstatement costs are not deductible as they are considered to be capital expenditure disallowed under section 15(1)(c) of the Income Tax Act (ITA). This is because such expenditure are usually incurred in respect of business premises vacated and hence no longer used for acquiring income. Following a review of the tax treatment for reinstatement cost, we concluded that there are merits in considering costs incurred under certain conditions to have a nexus to the leasing of the premises for use by the business and hence deductible under Section 14(1) of the ITA. Specifically, we are prepared to allow the deduction where the costs incurred meet the following conditions:-
a) Costs claimed do not relate to provisions made under FRS 16(1) (i.e. expense has been incurred);
(b) Costs claimed are contractually provided for in the tenancy agreement and hence considered to be part of the costs of renting the property for use in the business in the first place; and
(c) The premises are not vacated due to cessation of business.
(1) Under paragraph 16 of FRS 16, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item, restoring the site on which the item is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.