Property Depreciation

Property depreciation and how it can work for your SMSF

Property depreciation is the process of claiming tax deductions for the natural wear and tear on the investment property and its fixtures and fittings. Depreciation deductions can substantially increase an investment property’s cash flow.

Every dollar of depreciation claimed each and every year, reduces your taxable income by the equivalent amount, which can add up to thousands of dollars per year. The money goes right to your bottom line and improves the cash flow of your SMSF.

To find out what tax deductions are possible for your SMSF, use the free BMT Tax Depreciation Calculator below:

Tax Depreciation Calculator

Claiming property depreciation

The latest legislation states that owners of second-hand residential properties can no longer claim depreciation for existing plant and equipment assets if contracts were exchanged after the 9th of May 2017 at 7:30pm.

Trustees can use the services of a quantity surveyor to prepare a property depreciation report. One example of a quantity surveyor company is BMT.

BMT can provide depreciation schedules for a range of investment properties. Their expert team of Quantity Surveyors will work with you and your Property Manager. They will visit the site and carry out a detailed inspection of the property and complete a tax depreciation schedule outlining the deductions your SMSF is entitled to. Superannuation Warehouse will then include these deductions as a claim in the SMSF Annual Return.

BMT Tax Depreciation Schedule can save an SMSF thousands of dollars:

  • The fee to the Quantity Surveyors can be claimed straight back in the same year’s tax return if the BMT Tax Depreciation Schedule is done before 30 June.
  • Depreciation Schedules are completed in CSV and Excel format for ease of use with accounting software.
  • BMT can help your SMSF claim and maximising deductions, even if the SMSF has not claimed extra depreciation in the previous 2 years’ tax returns.

To request a quote from BMT for deductions that your SMSF may be entitled to claim, please click on the button below:

Request a Quote

What an SMSF can claim as investment property deductions

An Investment Property must have been built after 1985. The ATO property depreciation legislation contains two distinct sections – Divisions 40 and 43 – that cover deductions available for different parts of the property.

Division 40 covers the depreciation of plant and equipment

These are not considered part of the property’s structure and can be easily removed. These include anything from the oven, range-hood, dishwasher and smoke alarms down to the carpet, garbage bins and shower curtain. If you exchanged contracts on a second-hand property after the 9th of May 2017 at 7:30pm and purchase new plant and equipment assets, you can claim depreciation on these. The legislation only governs existing assets that were in the property at the time of purchase. Investors who purchased a second-hand property before the cut-off date are exempt from the legislation changes and can continue claiming as before.These items wear out more quickly than structural elements and have an assumed lifespan of 10 years.

Division 43 covers the depreciation of capital works

It relates to the building structure and permanent fixtures. This includes things such as the foundations, walls and floors as well as windows, toilets and sinks. The deduction is available on residential investment properties that commenced construction after the 15th of September 1987. It can be claimed at a rate of 2.5 per cent for up to forty years. Second-hand property owners are eligible to claim depreciation on capital works carried out by themselves and by the previous owner. The structural elements of a building are deemed by the ATO to have an effective (or useful) life of 40 years. Therefore, if you have a building that cost $120,000 to build, of which $100,000 covered structural elements, you would be entitled to claim 2.5% depreciation against the structural elements every year for 40 years, which would bring you a tax deduction of $2,500 dollars every year!

Knowing these facts will allow you to maximize your depreciation claim. In our example, these items cost $20,000. The annual depreciation claim works out at $2,000 per year, every year for 10 years. Again, that’s a direct $2,000 reduction in your taxable income every year.

Combining the deductions available in Divisions 40 and 43 of this example would reduce your taxable income by $4,500 every year – that’s $45,000 over ten years!

 Additional tips and considerations…

  • The older the property, the lower the deduction you will be able to claim. This is because you can’t claim depreciation on the structural elements of a property built before 1985.
  • Claiming property depreciation will not only significantly reduce SMSF taxes, it might also turn a negatively geared investment into a positive, profitable one!
  • And, if your property is currently making money, claiming property depreciation might make it even more profitable.

Remember if you buy a property by making a loan in the SMSF, you need to have a Bare Trust. For more info relating to Bare Trust, please see here.

  • Francis John Weir

    I have been considering a SMSF and have read up on a bit of
    information on your site and others, but I have a question I have not
    been able to find an answer to;

    Being mindful of the ‘arms length’ rule, and also the sole purpose rule, is there any
    allowance for someone to purchase a property to renovate and sell for a
    profit? Then repeat that process to increase the value of the properties
    being purchased and sold.

    Presumably I am allowed to employ a builder to carry out these renovations for me? If so what
    are the restrictions on a builder being paid by his own SMSF for such
    work?

    This might be a bit of a grey area, or the answer may be a resounding ‘no’ but, as I mentioned, I could not find the answer.

    • superannuationwarehouse

      Francis,

      In general, you cannot renovate properties with the aim of selling it on. The purpose should be the long term retirement benefit.

      Investments should be a passive investment. So usually the aim it to purchase a property and earn rental income or have shares and receive a dividend income. When owning a property, you can maintain it as needed. But the aim is should not be a short term benefit.

      From the above you will note the Super legislation is quite conservative with the aim of preserving your retirement benefit. An SMSF is not allowed to carry out a business within the Fund. From the example you noted I think you will agree the aim is close to that of running a business and would therefore not be allowable.

      On your question regarding Trustee remuneration – in general you can only be paid from the SMSF if the functions performed are your normal occupation. The normal rule would be Trustees cannot be paid for their duties as a Trustee. To be eligible for a payment, the following criteria must apply:
      * The Trustee must be appropriately qualified and hold all necessary licenses;
      * The Trustee performs the duties or services in the ordinary course of a
      business carried on by the Trustee for the public; and
      * Remuneration is determined at arm’s length.

      In conclusion, if the Fund owns a property with the intention to rent it out and then happen to sell it for a profit – all good. But the Trustee cannot have the objective of property development in an SMSF.

      Trust this makes sense.

      Trust this answer your question

    • superannuationwarehouse

      Francis,

      In general, you cannot renovate properties with the aim of selling it on. The purpose should be the long term retirement benefit.

      Investments should be a passive investment. So usually the aim it to purchase a property and earn rental income or have shares and receive a dividend income. When owning a property, you can maintain it as needed. But the aim is should not be a short term benefit.

      From the above you will note the Super legislation is quite conservative with the aim of preserving your retirement benefit. An SMSF is not allowed to carry out a business within the Fund. From the example you noted I think you will agree the aim is close to that of running a business and would therefore not be allowable.

      On your question regarding Trustee remuneration – in general you can only be paid from the SMSF if the functions performed are your normal occupation. The normal rule would be Trustees cannot be paid for their duties as a Trustee. To be eligible for a payment, the following criteria must apply:
      * The Trustee must be appropriately qualified and hold all necessary licenses;
      * The Trustee performs the duties or services in the ordinary course of a
      business carried on by the Trustee for the public; and
      * Remuneration is determined at arm’s length.

      In conclusion, if the Fund owns a property with the intention to rent it out and then happen to sell it for a profit – all good. But the Trustee cannot have the objective of property development in an SMSF.

      Trust this makes sense.

      Trust this answer your question

  • Jaime Aguirre

    I have purchased a property in my SMSF, and want to make some renovations in order to sell it. All the money will obviously go to the SMSF. Am I legally allowed to do that?

  • michael noonan

    When a SMSF holding a property enters pension phase does the ability to claim depreciation cease?

    • Hein Preller

      Michael,

      An SMSF can still claim depreciation in pension phase and this will lower the SMSF’s taxable income. However, the lower income is of limited use as an SMSF is taxed at a rate of NIL in the pension phase.

      For the reason noted above, its then sensible to bring forward depreciation expenses. This also give a better outcome for time-value of money to claim depreciation earlier rather than later. Generally, the most effective way is to use a quantity surveyor’s report to claim depreciation expenses. The steps to obtain a report is listed here:

      https://www.smsfwarehouse.com.au/smsf-investments/property/investment-rules/

      BMT is the provider we usually use and their guarantee is that if you don’t save more tax than the fee to them, the report is free.

      Its a good deal!

  • Mi

    Hi, I have a property my trust owns outright. This is in SMSF, under a corporate trust. I am the sole director of this corporate trust. I have been doing repairs and maintenance to the property for over a year. The trust may rent this out for a period or decide to sell to buy something else with higher capital growth.
    Can my SMSF trust use SMSF funds to buy furniture, whitegoods or furnishings to style the property in the interests of renting fully furnished and/ or selling? Thanks M

    • Hein Preller

      Mi,

      Sure you can incur these expenses. Just make sure all expenses are for the sole purpose of the SMSF and your retirement benefit:

      https://www.smsfwarehouse.com.au/smsf-investments/sole-purpose-test/

      We have some funds that do exactly what you describe and then rent out via Air BnN. Its obviously your choice who you let you property out to.

      Best of luck in obtaining the best yield possible.

      • Mi

        Thanks Hein for answering questions. All very helpful. :)

  • Mi

    Just one other question too…if i own this property outright, am I able to sub-divide and/or demolish and rebuild? This is something potentially I could look at in future as large land size.

    • Hein Preller

      Mi,

      Your statement is correct. You can go for it.

      Its only of there’s a bare trust on place when you use loans that these restrictions apply. As the property is described in detail in the Bare Trust, you can’t change the nature of the property. For example, you can’t make a 3 bedroom house a 4 bedroom.

      However, as you own it outright, these restrictions do not apply to your Fund.

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