Yes, when property is owned within an SMSF it should be claiming deductions for all of the allowable expenses and deductions associated with the ownership of that property, including depreciation.
Capital allowance and depreciation deductions are often overlooked by SMSF trustees and accountants when finalising the trust accounting at the end of financial year.
As a result many SMSFs overpay their taxes, sometimes by thousands of dollars every year.
Depreciation is an expense associated with holding the investment property and is deducted from income in the same way as other expenses such as borrowing costs, property management fees, repairs and maintenance etc.
The effect of claiming this deduction is that it reduces the taxable income of the SMSF, and thereby reduces the tax payable by the SMSF, or creates an additional tax return or contribution to the SMSF.
Case study example:
Our clients George and Samantha purchased a warehouse consisting of 92sqm of office/showroom space, a kitchenette, bathroom amenities, and 185sqm of warehouse space through their SMSF in March 2018. They purchased the warehouse for $595,000 with a rental income of $670 per week, which gives a total income of $34,840 per annum.
The tax deductible expenses for the warehouse which include interest rates, management fees, land rates and maintenance total $39,249. This means that the SMSF warehouse has a taxation loss $4,409 before going to their accountant and completing their tax return.
The table below outlines the difference in cash flow to George and Samantha without claiming tax depreciation and with claiming depreciation for the SMSF warehouse.
If George and Samantha didn’t claim tax depreciation on their SMSF warehouse they would be making a loss of $55.11 per month.
But George and Samantha took their accountants advice and contacted Capital Claims Tax Depreciation to complete a tax depreciation schedule for their SMSF warehouse. This allowed them to claim their tax depreciation entitlements and create an additional $223.20 per month for their SMSF.
The rules for the depreciation of buildings and assets are set out by the ATO and can be complex and confusing. Different rules apply depending on the property type, when the property was purchased and the nature of use of the property.
Depreciation is calculated from the total construction cost of a building, as well at the total installed cost, or assessed value of the included assets (plant and equipment).
Capital allowances and depreciation deductions are claimed under Division 43, and Division 40 provisions of the Income Tax Assessment Act.
The most effective way to ensure you are claiming your capital allowances and depreciation accurately is to engage the services of a specialist quantity surveyor to prepare a depreciation schedule.
Depreciation schedules for SMSF properties are essentially prepared in the same way as a depreciation schedule is prepared for an individual.
A depreciation schedule is typically a one-off purchase and can be used to account for your deductions each year, for the full depreciable life of the property (typically 40 years).
Not all quantity surveyors are depreciation specialists. A depreciation specialist is not only a construction cost expert, but also has comprehensive knowledge of the relevant tax legislation. The ATO requires that quantity surveyors who sell depreciation schedules are also registered tax agents, registered with the Australian Tax Practitioners Board.
Using a specialist quantity surveyor, who is also a registered tax agent will help to ensure that you are maximising the tax benefits available to you, as well as remaining ATO compliant in the event of an audit.
Capital Claims Tax Depreciation are quantity surveyors, depreciation specialists and registered tax agents, and have been providing industry leading depreciation schedules for property investors since 2008. Visit the Capital Claims Tax Depreciation website.
Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.View all posts by Mark Wilkins