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.

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 maximizing 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:

In order to claim depreciation on an Investment Property, the Property must have been build after the 15th of September 1987. 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 1987.
  • 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.

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

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