Many SMSF trustees have been keen to take up the option to purchase property as part of an SMSF portfolio, now that the law allows this. If an SMSF owns commercial properties, a trustee’s business may even rent the premises, provided the corporation pays what is seen to be a fair market value rent.
And smart property investment means claiming appropriate depreciation deductions.
Accountants can play a pivotal role here. They can make clients aware of depreciation and implement a depreciation schedule to reduce tax liabilities and substantiate claims. They can keep accurate records and ensure the right deductions are made.
Claiming depreciation for SMSF properties
As with any other property investment, an investment in real estate by an SMSF creates an entitlement to a capital works deduction for the wear and tear on a building’s structure and also for the depreciation of all plant and equipment items contained inside and outside the property.
The deductions claimed from depreciation can greatly reduce a fund’s tax liability, so it is important for accountants to contact a specialist quantity surveyor to request a depreciation schedule on behalf of the SMSF Let’s look at a before and after depreciation scenario for an SMSF that owns a two-bedroom apartment purchased for $620,000. In this case, the property has a rental income of $650 per week, resulting in a total income of $33,800 per annum.
Expenses for the property, such as interest rates, management fees and holding costs, totalled $41,724. Therefore, the SMSF has a tax-deductible loss for this residential property of $7,924 prior to lodging their tax assessment. The tables above show the difference that claiming depreciation will make to a property owned in an SMSF.
Without claiming depreciation, the SMSF is only able to claim $7,924 and reduce the fund’s tax liability by $1,189, resulting in a negative cash position of -$130 per week. A typical two-bedroom apartment would expect around $15,500 in depreciation available in the first full year.
By claiming $15,500 in depreciation, the total deductible loss is increased to $23,424. By claiming the 15 percent on the total deductible loss of $23,424, the SMSF’s tax liability will be reduced by $3,514, thereby adding $2,325 to the retirement fund in the first year.
