General / Jul 01, 2025

Claiming Depreciation on SMSF Rental Properties

Lepapa Mua
Interior of a modern SMSF rental property with natural light, neutral tones, and minimal furniture—used to illustrate property depreciation context
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What Accountants and Advisers Must Know about SMSF Property Depreciation and CGT

Depreciation

Depreciation is indeed a method of allocating the cost of a depreciating asset over its effective life, reflecting its usage, wear and tear, or obsolescence.

This helps businesses more accurately match expenses with the income generated by those assets, which is key for financial reporting and tax purposes.

What Can Your Clients Claim?

The Australian Taxation Office (ATO) provides guidance on how to determine the effective life of assets through Taxation Ruling TR 2022/1, which took effect from 1 July 2022. This ruling outlines how the Commissioner estimates the effective life of various depreciating assets under section 40-100 of the Income Tax Assessment Act 1997.

It includes detailed tables (Tables A and B) listing effective lives for assets across different industries and general categories.

As their adviser, you can assist clients by either:

  • Using the Commissioner’s effective life determination from TR 2022/1, or
  • Making a reasonable self-assessment, as long as it complies with relevant legislation

Why SMSF Trustees Continue to Invest in Property

Property remains a popular asset class within SMSFs, offering trustees long-term growth potential and control. Key benefits your clients may gain include:

  • Concessional tax treatment: Rental income is taxed at 15% in accumulation phase and potentially 0% in pension phase. Capital gains on property held for over 12 months may receive a one-third CGT discount.
  • Greater control: Trustees can directly select, manage, and finance the property—unlike traditional super funds.
  • Borrowing capacity: SMSFs can access property investments using Limited Recourse Borrowing Arrangements (LRBAs), enabling larger acquisitions while safeguarding other fund assets.
  • Portfolio diversification: Direct property can help reduce exposure to equities or managed funds.

Key Compliance Considerations for Advisers

When advising clients on SMSF property strategies, ensure the following are addressed:

  • Sole purpose test: The investment must be solely for retirement benefit purposes.
  • No related-party use: The property cannot be used or rented by members or their relatives.
  • Borrowing rules: Borrowed funds must only be used for acquisition, not improvement, of the asset.
  • Liquidity risks: Illiquid assets like property can impact the fund’s ability to meet pension or tax obligations, particularly under new rules affecting super balances above $3 million.

Supporting Clients Buying Investment Property via SMSF in 2025

Scenario: A couple, both individual trustees of their SMSF, plan to purchase a $700,000 residential investment property in Sydney to generate rental income and long-term capital growth.

1. Review the Investment Strategy

Ensure the SMSF’s investment strategy explicitly allows for direct property investment. It should adequately address risk, liquidity, diversification, and retirement objectives. Assist your clients in updating the strategy if necessary.

2. Confirm Sole Purpose Compliance

Advise your clients that the investment must strictly satisfy the sole purpose test. It must provide retirement benefits only. Make clear that personal use is prohibited, including by themselves or related parties.

3. Guide Proper Structuring

If the purchase involves borrowing, help set up a compliant Limited Recourse Borrowing Arrangement (LRBA). A bare trust will need to be established to hold the legal title of the property until the loan is repaid. Ensure all structuring meets SIS Act requirements.

4. Coordinate Financing

Assist the SMSF in securing appropriate funding. In this example, the fund borrows $500,000 and uses $200,000 from its own reserves. Ensure the loan terms meet limited recourse rules. Only the property should be at risk in the event of default.

5. Maintain Arm’s Length Standards

Ensure all transactions are conducted on commercial terms. This includes purchasing the property at market value and leasing it to unrelated tenants at a fair market rate.

6. Oversee Ongoing Compliance

Remind trustees of the importance of:

  • Obtaining annual property valuations (especially post-30 June 2025),
  • Keeping proper documentation (e.g. lease agreements, loan contracts, trust deeds),
  • Maintaining sufficient liquidity for pension payments and tax obligations.

7. Plan for Exit

Work with your clients on an appropriate exit strategy. Upon retirement, the property may be sold (with capital gains potentially tax-free in the pension phase), or retained as a source of income.

Capital Works and Depreciating Asset Deductions for SMSF Clients

When advising SMSF clients on newly acquired residential property, it’s important to consider both capital works deductions under Division 43 and depreciating asset deductions under Division 40 of the Income Tax Assessment Act 1997.

Division 43 – Capital Works Deductions
Capital works deductions apply to structural elements of the property and eligible fixed assets.

  • Depreciation Rate: 2.5% per annum
  • Duration: Up to 40 years (applicable to residential properties constructed after 15 September 1987)
  • Eligibility: The property must be used to produce assessable income, such as rental income

In practice, these deductions can significantly reduce the fund’s taxable income over time. Ensure that the property is income-producing and that a qualified quantity surveyor is engaged to accurately allocate costs between land, structural elements, and plant and equipment.

Capital Works Deduction Example

In this scenario, your SMSF client acquires a brand-new residential property for $700,000 on 1 August 2024.

Assumptions:

  • The full $700,000 is attributed to the building component (noting that land value must be excluded in actual claims)
  • Construction was completed after 15 September 1987
  • The property is rented from the date of acquisition

Step 1: Determine the Deductible Amount

Assuming the building portion is $500,000, the SMSF may claim capital works deductions as follows:
$500,000 × 2.5% = $12,500 per annum


Step 2: Apply First-Year Pro-Rata (2024–25)

Given the property is held for 11 months in the 2024–25 financial year:
$12,500 × (11 ÷ 12) = $11,458

Your client’s SMSF can therefore claim $11,458 in deductions for 2024–25, and $12,500 annually thereafter, for up to 40 years, provided the asset remains eligible.


Adviser Notes:

  • Land value cannot be depreciated – recommend a qualified quantity surveyor to prepare an accurate cost allocation between land and building
  • Division 43 deductions may continue even after the property is sold, which can have implications for CGT calculations
  • Ensure the property usage remains consistent with the sole purpose test and supports the fund’s retirement objectives

Depreciating assets in rental properties – Division 40

In the context of Australian rental properties, depreciating assets are items within the property that decline in value over time due to wear and tear and they can be a goldmine for tax deductions if used wisely.

What counts as a Depreciating Asset

Depreciating Assets in SMSF Rental Properties – Division 40

Under Division 40 of the Income Tax Assessment Act 1997, depreciating assets in residential rental properties represent a valuable opportunity to maximise deductions for your SMSF clients.

These assets are distinct from the building’s structure and typically have a shorter effective life due to wear and tear.

Depreciating assets are generally removable, mechanical, or non-structural items installed in the property. Common examples relevant to SMSF-owned rental properties include:

  • Appliances (e.g. dishwashers, ovens, air conditioners)
  • Furniture (e.g. sofas, dining tables)
  • Floor coverings (e.g. carpets, floating timber flooring)
  • Curtains and blinds
  • Hot water systems

For new properties, both Division 40 and Division 43 deductions can apply.

However, advisers should note that second-hand plant and equipment assets acquired after 9 May 2017 generally do not qualify for Division 40 deductions unless they are brand-new and installed in an income-producing context.

When structuring SMSF property investments, identifying and correctly classifying these assets early, with support from a qualified quantity surveyor, can unlock substantial tax benefits and ensure ongoing compliance.

These assets are claimed under Division 40 of the Income Tax Assessment Act 1997.

How Advisers Can Help Clients Claim Depreciation in SMSFs

There are two primary methods for claiming depreciation on depreciating assets within SMSF-owned rental properties:

  • Diminishing Value Method – allows higher deductions in the earlier years of the asset’s effective life.
  • Prime Cost Method – spreads deductions evenly across the asset’s effective life.

Determining Effective Life

The effective life of each asset can either be:

  • Based on the ATO’s ruling (e.g. TR 2022/1), or
  • Reasonably self-assessed by the trustee, provided the methodology complies with Division 40 of the Income Tax Assessment Act 1997.

Instant Asset Write-Off

Assets costing $300 or less may qualify for immediate deduction, provided they are:

  • Not part of a set that exceeds $300 in total, and
  • Used solely to produce assessable income

New vs. Established Properties

  • New residential properties: Eligible for both Division 43 (capital works) and Division 40 (plant and equipment) deductions.
  • Second-hand residential properties (acquired post–9 May 2017): Generally not eligible to claim Division 40 deductions unless the plant and equipment is brand new and installed for income-producing purposes.

Key Recommendations for Advisers

  • Engage a quantity surveyor to prepare a compliant, maximised depreciation schedule.
  • Maintain accurate records of asset purchase dates, installation costs, and usage history.
  • Where an asset is used partly for private purposes, ensure deductions are apportioned appropriately to reflect income-producing use only.

Proper structuring and documentation of depreciation strategies can significantly improve after-tax returns and support SMSF compliance.

Depreciation Example: Air Conditioner in a Residential SMSF Property

This example demonstrates how to calculate depreciation using the diminishing value method for an SMSF-owned rental property.

Scenario:

Your SMSF client purchases a brand-new split-system air conditioner for $2,400, installed on 1 August 2024 in an income-producing residential property.

Under TR 2022/1, the effective life of a split-system air conditioner is 10 years.


Step 1: Depreciation Rate Calculation

Using the diminishing value formula:

Depreciation rate = 200% ÷ Effective life
= 200% ÷ 10
= 20%


Step 2: First-Year Deduction (Pro-Rata)

Since the asset was installed on 1 August 2024, depreciation applies for 11 months of the 2024–25 financial year.

Deduction = Base value × Depreciation rate × (11 ÷ 12)
= $2,400 × 20% × (11 ÷ 12)
= $440


Step 3: Depreciation in Subsequent Years

For each year after installation, the SMSF should apply 20% to the opening adjustable value of the asset to calculate depreciation under the diminishing value method.


The complete depreciation schedule for the asset’s effective life is outlined in the table below. This provides a clear view of how the asset’s value reduces over time and helps in planning future deductions accurately.

YearOpening ValueDeductionClosing Value
2024–25$2,400.00$2,400 × 20% × 11/12 = $440.00$1,960.00
2025–26$1,960.00$1,960 × 20% = $392.00$1,568.00
2026–27$1,568.00$1,568 × 20% = $313.60$1,254.40
2027–28$1,254.40$1,254.40 × 20% = $250.88$1,003.52
2028–29$1,003.52$1,003.52 × 20% = $200.70$802.82
2029–30$802.82$802.82 × 20% = $160.56$642.26
2030–31$642.26$642.26 × 20% = $128.45$513.81
2031–32$513.81$513.81 × 20% = $102.76$411.05
2032–33$411.05$411.05 × 20% = $82.21$328.84
2033–34$328.84$328.84 × 20% = $65.77$263.07

The SMSF can continue to claim 20% annually on the declining balance until the asset is fully depreciated, with the remaining residual value written off when it becomes negligible.

Prime Cost Method Example (same asset, different approach)

Using the same scenario, an SMSF installs a brand-new split-system air conditioner valued at $2,400 on

1 August 2024, but applying the prime cost method instead:


Step 1: Determine the Depreciation Rate

Under the prime cost method, depreciation is calculated at a consistent annual rate over the asset’s effective life:

Depreciation rate = 100% ÷ Effective life
= 100% ÷ 10 = 10%


Step 2: First-Year Deduction (2024–25)

Since the asset was installed on 1 August 2024, the SMSF can claim depreciation for 11 months in the 2024–25 financial year:

First-year deduction = $2,400 × 10% × (11 ÷ 12) = $220


Step 3: Full-Year Deduction from 2025–26 Onward

For the remaining 9 years, the fund can claim an annual deduction of $240, calculated as:

$2,400 × 10% = $240

This method provides stable, predictable deductions year-on-year, ideal for long-term tax planning within the SMSF.


Full Depreciation Schedule (Prime Cost Method)

The table below outlines the full 10-year depreciation schedule for a $2,400 split-system air conditioner, using the prime cost method. This method applies a fixed rate of 10% annually over the asset’s effective life.

The first year reflects a pro-rata deduction for 11 months, given the asset was installed on 1 August 2024. Each subsequent year shows the fixed annual deduction and the asset’s declining closing value.

This structured view allows advisers to quickly reference annual depreciation values, support client recordkeeping, and plan SMSF cash flow obligations accurately.

YearDepreciation FormulaDeductionClosing Value
2024–25$2,400 × 10% × (11 ÷ 12)$220.00$2,180.00
2025–26$2,400 × 10%$240.00$1,940.00
2026–27$2,400 × 10%$240.00$1,700.00
2027–28$2,400 × 10%$240.00$1,460.00
2028–29$2,400 × 10%$240.00$1,220.00
2029–30$2,400 × 10%$240.00$980.00
2030–31$2,400 × 10%$240.00$740.00
2031–32$2,400 × 10%$240.00$500.00
2032–33$2,400 × 10%$240.00$260.00
2033–34$2,400 × 10%$240.00$20.00
2034–35Remaining value$20.00$0.00

Depreciation Comparison Table Diminishing value method versus Prime cost method

The table below compares the Diminishing Value and Prime Cost depreciation methods over a 10-year period for a $2,400 split-system air conditioner. It highlights the deduction available each year under both approaches, along with the annual difference.

This side-by-side view allows advisers to:

  • Evaluate which method yields higher upfront deductions
  • Support clients in cash flow planning and tax minimisation strategies
  • Make informed recommendations aligned with investment timelines

As shown, the Diminishing Value method delivers higher deductions in the earlier years, while the Prime Cost method spreads deductions evenly across the asset’s effective life.

YearDiminishing Value DeductionPrime Cost DeductionDifference
2024–25$440.00$220.00+$220.00
2025–26$392.00$240.00+$152.00
2026–27$313.60$240.00+$73.60
2027–28$250.88$240.00+$10.88
2028–29$200.70$240.00–$39.30
2029–30$160.56$240.00–$79.44
2030–31$128.45$240.00–$111.55
2031–32$102.76$240.00–$137.24
2032–33$82.21$240.00–$157.79
2033–34$65.77$240.00–$174.23

The Diminishing Value method can significantly boost deductions in the initial years.

Particularly beneficial for SMSFs seeking early-stage tax offsets.

However, the Prime Cost method offers greater consistency, making it easier to forecast long-term deductions. Advisers should consider the client’s investment horizon, cash flow needs, and long-term tax position when recommending a method.

When it comes to depreciation strategies for SMSFs, the best tax advice is all about maximising deductions while staying compliant with superannuation and tax laws.



Here’s a tailored guide to help your SMSF client get the most out of depreciation in 2025

  1. Help Your Clients Maximise Division 43 and Division 40 Deductions
  • Division 43 (Capital Works): SMSFs may claim 2.5% annually over 40 years for structural components such as walls, roofing, and built-in cabinetry. Applicable only to properties constructed after 15 September 1987.
  • Division 40 (Plant and Equipment): Advise clients to claim depreciation on eligible removable assets, such as appliances and carpets, using either the diminishing value or prime cost method.

Guide Clients in Choosing the Right Depreciation Method

For Division 40 assets:

  • Use Diminishing Value for clients seeking higher deductions in the early years
  • Use Prime Cost for those preferring consistent, predictable deductions

The optimal method will depend on their cash flow preferences and long-term strategy.

Note: SMSFs cannot claim Division 40 deductions on second-hand assets in residential properties acquired after 9 May 2017.

2. Recommend a Tax Depreciation Schedule

Encourage clients to engage a qualified quantity surveyor to prepare a comprehensive depreciation schedule. This helps ensure:

  • Accurate apportionment between land, capital works (Division 43), and plant & equipment (Division 40)
  • Full access to all allowable deductions
  • Compliance with ATO documentation standards

This is particularly important for newly constructed properties or those with significant renovations, where the potential for maximising deductions is highest.

3. Identify Immediate Deduction Opportunities

For eligible rental properties held within an SMSF, remind clients that certain low-cost assets may qualify for immediate deductions:

  • Assets under $300 (e.g. smoke alarms, light fittings) can be written off in full if used to generate income.
  • Low-value pooling is available for assets costing less than $1,000, allowing accelerated depreciation over time.

These strategies can improve short-term cash flow and optimise the fund’s overall tax position. Ensure clients are aware of ATO criteria and reporting obligations.

4. Align Depreciation Strategy with SMSF Phase

Advise clients to consider how depreciation impacts the fund’s tax position depending on its current phase:

  • Accumulation Phase: Depreciation reduces the fund’s taxable income, which is generally taxed at 15%.
  • Pension Phase: Income and capital gains may be tax-free, meaning depreciation deductions may have reduced or no tax impact.

Strategic timing of asset purchases, disposals, and major claims can significantly influence after-tax outcomes.

Encourage forward planning to align depreciation strategy with the client’s retirement timeline.

5. Maintain SMSF Compliance with Depreciation Claims

Advisers should guide clients to stay compliant when claiming depreciation within an SMSF:

  • Sole Purpose Test: Ensure the property is used exclusively to provide retirement benefits to members.
  • Record Keeping: Maintain thorough documentation of all asset purchases, installation dates, and usage patterns to support claims.
  • Annual Review: Reassess the depreciation schedule each year to capture any asset disposals, upgrades, or changes in usage.

This approach supports accurate reporting and reduces audit risk.

Maximise SMSF Property Deductions with Strategic Guidance

Understanding how to leverage depreciation under Division 40 and Division 43 can significantly improve after-tax returns for your SMSF clients. By selecting the right methods, maintaining compliant documentation, and aligning depreciation strategies with your clients’ retirement goals, advisers can deliver meaningful financial outcomes. Whether it’s a brand-new build or a long-term investment, depreciation planning remains a powerful tool within your advisory toolkit.

Looking to streamline SMSF compliance and administration?

Contact our SMSF specialists to discuss your clients’ circumstances or access our full range of SMSF administration and support services.

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