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 $1,200,000. The following tables illustrate how the depreciation saves tax over the life of the investment:
Tax Savings for Depreciation
| Date | Cost/Opening Written Down Value ($) | Plant and Equipment (Division 40) Assets Per Depreciation Schedule ($) | Capital Works (Division 43) Per Depreciation Schedule ($) | Closing Written Down Value ($) | Tax Savings Per year ($) |
| 30/06/2018 | 643,810.00 | 7,693.00 | 6,333.00 | 629,784.00 | 2,103.90 |
| 30/06/2019 | 629,784.00 | 9,578.00 | 10,460.00 | 609,746.00 | 3,005.70 |
| 30/06/2020 | 609,746.00 | 7,564.00 | 10,460.00 | 591,722.00 | 2,703.60 |
| 30/06/2021 | 591,722.00 | 5,692.00 | 10,460.00 | 575,570.00 | 2,422.80 |
| 30/06/2022 | 575,570.00 | 4,578.00 | 10,460.00 | 560,532.00 | 2,255.70 |
| 30/06/2023 | 560,532.00 | 3,555.00 | 10,460.00 | 546,517.00 | 2,102.25 |
| 30/06/2024 | 546,517.00 | 3,193.00 | 10,460.00 | 532,864.00 | 2,047.95 |
| 30/06/2025 | 532,864.00 | 2,462.00 | 10,460.00 | 519,942.00 | 1,938.30 |
| 30/06/2026 | 519,942.00 | 2,137.00 | 10,460.00 | 507,345.00 | 1,889.55 |
| 30/06/2027 | 507,345.00 | 1,827.00 | 10,460.00 | 495,058.00 | 1,843.05 |
| 30/06/2028 | 495,058.00 | 1,423.00 | 10,460.00 | 483,175.00 | 1,782.45 |
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:
| Details | Capital Gain Tax for the Depreciated Property | Capital 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: | $24,095.25 | Nil |
| 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.
Keep up to date with all the latest SMSF news and updates by subscribing to SMSF Engine’s newsletter.
