News / Oct 31, 2021

Depreciation, Rental Properties & SMSFs

Abra Chowdhury
Share Share Share Share

Claiming Depreciation on Rental Properties

It is not surprising that many people use SMSFs to invest in direct property. There are many advantages to investing in direct property including the ability to claim depreciation. It is important to claim all eligible tax deductions, to maximise the SMSF’s return on investment. Depreciation is not an out-of-pocket expense so it can be easily missed.

What can you claim?

Depreciation is a financial term used to illustrate the decline of the asset’s value over time due to wear and tear. Income Tax Assessment Act 1997 allows a depreciation deduction on rental property.

Plant and Equipment (Division 40) Assets:

Plant and equipment are easily transferable or mechanical assets from a residential or commercial property. Examples of Division 40 assets include air conditioners, blinds and curtains, security items, ovens, hot water systems, manufacturing equipment, carpet and flooring.

Capital Works (Division 43)

Building and structural improvements capital works can be depreciated for income-producing property under this section. Capital works include buildings or extensions, building improvements, structural improvements, and earthwork for environmental protection. The following ATO link describes the types and the date of construction to fall under this:

Calculate your capital works deductions

The following example illustrates how depreciation can assist with maximising tax savings. Assuming ABC SMSF is an accumulation fund and recently acquired a brand-new investment property at a cost of $643,810. The disposal value of the property on 1st July 2028 is $1,200,000.  The following tables illustrate how the depreciation saves tax over the life of the investment:

Tax Savings for Depreciation

DateCost/Opening Written Down Value ($)Plant and Equipment (Division 40) Assets Per Depreciation Schedule ($)Capital Works (Division 43) Per Depreciation Schedule ($)Closing Written Down Value ($)Tax Savings Per year ($)

Total Tax Savings in 10 Years: $24,095.25

Capital Gains Tax for the Depreciated Property

Property Sold 30/06/2028 $1,200,000.00
Property CWDV as at 30/06/2028 $483,175.00
Gross Capital Gain $716,825.00
Less: 33.33% Capital Gain Discount $238,941.67
Taxable Gain on the property $477,883.33
15% Tax on Taxable Gain $71,682.50

Capital Gains Tax for the Property Where Depreciation is Ignored

Property Sold 01/07/2021$1,200,000.00
Property CWDV as at 30/06/2021$643,810.00
Gross Capital Gain $556,190.00
Less: 33.33% Capital Gain Discount $185,396.67
Taxable Gain on the property$370,793.33
15% Tax on Taxable Gain$55,619.00

Comparative Tax Savings in 10 years’ time for the Disposed Property as of 30 June 2028:

DetailsCapital Gain Tax for the Depreciated PropertyCapital Gain Tax for a Property Where Depreciation is Ignored
Tax Liability at Disposal: $71,682.50 $55,619.00
Less: Tax Savings over the 10 years: $24,095.25Nil
Actual Tax Liability in 10 years: $47,587.25 $55,619.00
Tax Favour for the Depreciated Property in 10 years: $8,031.75

We can see after 10 years, ABC SMSF will save $8,031.75 in tax if depreciation is accounted for. Obtaining a depreciation schedule from a qualified quantity surveyor make this task simple. A depreciation schedule is a report which lists the depreciable assets for a property. The reports show the deductible depreciable value for assets year by year throughout the life of the assets. Follow this link to obtain your free estimate.

Click here to request a Free Property Depreciation Estimate

Similar Posts

News / Monday, September 13th, 2021

Trustees need to plan for Tragedy

When planning for the difficult event of an SMSF member becoming incapacitated, there are a number of considerations. One of […]

Alex Polorotoff
SMSF Compliance
News / Tuesday, February 15th, 2022

SMSF Compliance Obligations – Everything You Need to Know

The number one reason people choose self-managed super funds over public or retail ones is control over their assets and […]

Mark Phillips