Leasehold Improvements in Australia: 2026 Business Guide

Leasehold improvements are changes or upgrades made by a tenant to a leased property to suit their business needs. These improvements can range from minor alterations to major renovations and typically become part of the property, remaining in place when the lease ends.

Examples of leasehold improvements include:

• Installing partition walls or new flooring
• Upgrading lighting and electrical systems
• Fitting out kitchens or bathrooms
• Adding accessibility features
• Customising retail or office spaces with shelving, signage, or counters

It's important to note that leasehold improvements differ from general repairs or maintenance. Improvements are usually more substantial and are intended to enhance the functionality or appearance of the premises for the tenant's specific use.

Tenant and Landlord Responsibilities

The responsibility for funding and maintaining leasehold improvements is typically outlined in the lease agreement. Sometimes, landlords may contribute to the cost or offer incentives, such as rent-free periods, to attract or retain tenants. Clear communication and negotiation are essential to avoid misunderstandings about who owns the improvements and what happens to them at the end of the lease.

The way leasehold improvements are treated for tax purposes in Australia can have a significant impact on your business's finances. In 2026, the Australian Taxation Office (ATO) continues to treat most leasehold improvements as capital works, meaning they are not immediately deductible but are depreciated over time.

Capital Works Deduction

Generally, structural improvements—such as new walls, built-in cabinetry, or plumbing—are considered capital works. These are typically depreciated at a set rate per year over a long period. For many improvements, this means claiming a portion of the cost each year rather than all at once.

Depreciating Assets

Some items, such as removable partitions, furniture, or certain equipment, may be classified as depreciating assets. These can often be written off more quickly than structural works, depending on their effective life and the relevant tax rules.

Instant Asset Write-Off

For eligible businesses, the instant asset write-off allows for the immediate deduction of certain assets up to a specified threshold. The threshold and eligibility criteria can change from year to year, so it's important to check the current rules or consult with a tax professional to determine what applies to your situation in 2026.

End of Lease Considerations

When a lease ends, tenants may be required to remove improvements or restore the premises to its original condition. If improvements are removed or written off, there may be tax implications, such as a balancing adjustment. It's important to plan for these scenarios and understand how they may affect your tax position.

Upgrading a leased space can require substantial capital, but there are several ways Australian businesses can finance leasehold improvements in 2026.

Business Loans

Many banks and non-bank lenders offer business loans that can be used for fit-outs and renovations. These loans may be secured or unsecured, with terms and interest rates varying depending on the lender and the borrower's financial profile. Loan terms often range from one to five years, and established businesses may have access to more competitive rates.

Asset Finance

If your improvements involve purchasing equipment or specialised assets, asset finance or equipment loans may be suitable. These loans are typically secured against the asset being financed and can offer flexible repayment options.

Landlord Contributions and Incentives

In some cases, landlords may offer incentives to tenants undertaking significant improvements. These can include direct financial contributions, rent-free periods, or reduced rent. Such incentives are often negotiated as part of the lease agreement, especially in competitive commercial property markets.

Planning Your Funding Approach

When considering how to fund leasehold improvements, it's important to assess your business's cash flow, the expected return on investment, and the terms of your lease. Consulting with a finance specialist or broker can help you compare options and choose the best fit for your needs. For more information on business finance options, visit our finance page.

Modern leasehold improvements must meet a range of compliance and sustainability standards. In 2026, businesses should be aware of the following considerations:

Building Code and Regulatory Compliance

All improvements must comply with the National Construction Code and any relevant local council regulations. This includes fire safety, accessibility, and structural requirements. Failing to comply can result in delays, additional costs, or legal issues.

Sustainability and Energy Efficiency

With increasing focus on sustainability, many businesses are incorporating energy-efficient lighting, insulation, and water-saving fixtures into their fit-outs. These upgrades can help reduce operating costs and may be required under federal or state regulations.

Digital Integration and Technology

As workplaces evolve, integrating technology—such as smart security systems, digital signage, or advanced AV solutions—has become common. Planning for future upgrades and ensuring your improvements are adaptable can help your business stay competitive and responsive to changing needs.

Working with Professionals

Engaging fit-out specialists, legal advisors, and accountants can help ensure your project meets all requirements and maximises value. Professional advice is especially important when navigating complex lease agreements or significant investments.

1. Review Your Lease: Understand your rights and obligations regarding improvements, including approval processes and end-of-lease conditions.
2. Plan Your Budget: Factor in all costs, including design, construction, compliance, and potential restoration at lease end.
3. Consult Professionals: Seek advice from accountants, legal advisors, and fit-out experts to avoid costly mistakes.
4. Secure Finance: Explore funding options early to ensure your project can proceed smoothly.
5. Focus on Compliance and Sustainability: Ensure all works meet current standards and consider future needs.

What counts as a leasehold improvement?

Leasehold improvements are changes made by a tenant to a leased property to suit business needs, such as installing partitions, upgrading lighting, or fitting out kitchens.

Can I claim leasehold improvements as a tax deduction?

Most leasehold improvements are depreciated over time rather than being immediately deductible. Some assets may qualify for faster write-off, depending on current tax rules and your business's eligibility.

Who pays for leasehold improvements—the tenant or landlord?

Responsibility for funding improvements is usually negotiated in the lease agreement. Sometimes landlords contribute or offer incentives, but tenants often cover the cost of custom fit-outs.

What happens to improvements at the end of the lease?

Improvements typically remain with the property, but tenants may be required to remove them or restore the premises, depending on the lease terms.

Leasehold improvements can transform a leased space into a productive and attractive environment for your business. By understanding the tax treatment, financing options, and compliance requirements in 2026, you can make informed decisions and maximise the value of your investment. Careful planning and professional advice will help ensure your project runs smoothly and supports your business goals.