For many Australian businesses, a leased property is more than just four walls and a roof—it’s the canvas for growth, brand identity, and operational efficiency. Leasehold improvements, those modifications or upgrades made to a leased space, are a significant investment decision. With updates to tax policy and financing options in 2025, understanding the ins and outs of leasehold improvements is more crucial than ever.
What Are Leasehold Improvements?
Leasehold improvements refer to the alterations, renovations, or customisations tenants make to a rental property to fit business needs. This could include installing partition walls, upgrading lighting, fitting out kitchens, or even adding accessibility features. Unlike general repairs, these improvements typically become part of the property and remain when the lease ends.
Common examples of leasehold improvements in Australia:
- Office fit-outs (new workstations, meeting rooms, or tech infrastructure)
- Retail store refurbishments (shelving, signage, display counters)
- Medical or hospitality upgrades (consultation rooms, commercial kitchens)
Importantly, the costs and benefits of leasehold improvements are shared between tenants and landlords. Clarity around who pays for what, and what happens at the end of the lease, is essential in any lease negotiation.
2025 Tax Treatment & Depreciation of Leasehold Improvements
The tax landscape for leasehold improvements in Australia has evolved, with the ATO’s 2025 updates impacting both small businesses and large enterprises. Leasehold improvements are generally treated as capital works, meaning they’re not immediately deductible, but are instead depreciated over time. Here’s how it works in 2025:
- Capital Works Deduction: Most improvements are depreciated at 2.5% per annum over 40 years, under Division 43 of the Income Tax Assessment Act.
- Instant Asset Write-Off: For qualifying businesses (aggregated turnover under $10 million), the instant asset write-off threshold has been raised to $25,000 per asset in 2025. Certain improvements—like furniture or removable partitions—may qualify for immediate deduction.
- End of Lease Considerations: If you remove improvements at lease end, a balancing adjustment may apply, impacting your tax position.
It’s essential to distinguish between capital works (structural changes) and depreciating assets (plant and equipment), as the tax treatment differs. For example, installing a new HVAC system may be classified as plant and equipment, eligible for faster depreciation.
Financing Leasehold Improvements: Trends and Options in 2025
With the ongoing ‘return to office’ trend and a competitive retail landscape, demand for leasehold improvement finance remains strong. In 2025, Australian businesses have several funding options:
- Business Loans: Major banks and non-bank lenders offer unsecured business loans specifically for fit-outs and renovations. Expect terms of 1–5 years, with competitive rates for established businesses.
- Asset Finance: For improvements like specialised equipment, asset finance or equipment loans may be available, often with flexible repayment structures.
- Landlord Contributions: Many landlords are now more willing to offer incentives—such as rent-free periods or direct contributions—to attract quality tenants in a softening commercial property market.
For example, a Melbourne-based medical practice recently secured a $150,000 unsecured business loan to transform a dated shopfront into a modern clinic, leveraging both lender flexibility and a landlord-funded ‘fit-out allowance’ as part of lease negotiations.
Compliance, Sustainability, and Future-Proofing Your Investment
Australian businesses must now consider a broader set of factors before investing in leasehold improvements. In 2025, key trends include:
- Building Code Compliance: All improvements must comply with the National Construction Code and local council requirements. Failing to do so can result in costly rework or legal headaches.
- Sustainability Requirements: With new federal and state energy standards, integrating energy-efficient lighting, insulation, and water-saving fixtures can lower operating costs and future-proof your space.
- Digital Integration: Fit-outs increasingly include smart tech, from security systems to integrated AV. Ensure your improvements allow for future upgrades as business needs evolve.
Given the pace of change, working closely with fit-out specialists, legal advisors, and your accountant is vital to maximise return and avoid pitfalls.
Conclusion
Leasehold improvements are a powerful lever for business growth, helping you create a space that attracts customers and talent alike. With the right planning, understanding of 2025’s tax and financing environment, and a focus on compliance and sustainability, you can turn your leased premises into a strategic asset.