Depreciation Eligibility for SMSF Property
The decision to purchase a SMSF property requires careful consideration. However, there seems to be increasing popularity in using a SMSF to buy an investment property.
While it’s necessary to evaluate all the risks and compliance regulations that come with purchasing an investment property using your SMSF, there are various advantages you should consider too.
For example, SMSF members qualify to claim depreciation deductions for capital works and plant and equipment items in your SMSF property.
But what eligibility criteria must you meet?
Because this is an area of property investment that can get a bit tricky, we’ve put together some pointers you need to be aware of and those that can be to your advantage when it comes to claiming depreciation deductions on an SMSF property.
What Is an SMSF?
Before delving into depreciation, it’s necessary to define a SMSF.
In terms of Australian law, your employer is required to put money aside on your behalf into a superannuation fund while you are working. This is to ensure that you can have an income once you’ve retired.
However, if you would prefer to manage the account yourself, you can use a self-managed superannuation fund (SMSF), instead.
An SMSF is a private superannuation fund that you can manage by yourself, rather than having it managed by a superannuation provider.
The purpose of an SMSF is to give the member more control over their superannuation by allowing them to decide:
- how much money is paid into it (within regulatory limits); and
- where and how much of it is invested.
Your SMSF can have up to four members, all of whom are also considered trustees. If the fund has more than one member, each trustee will equally be responsible for the decisions made about the fund and its compliance with relevant laws.
One of the benefits of being in control of your SMSF is that you can use it as a vehicle to buy an investment property.
What Are the Laws Around SMSF Compliance?
SMSFs are required to comply with Australian superannuation legislation. Most importantly, the SMSF (as with all super funds), must be set up for the sole purpose of providing retirement benefits to its members.
What Factors Should Consider Before Buying an Investment Property With Your SMSF?
If you are considering purchasing an SMSF property, you should take note of the following factors, namely that:
- The SMSF property can’t be owned for the purpose of living in it. In other words, you can’t rent the SMSF property, nor can you personally live in it.
- The above rule similarly applies to any related parties and other trustees of the SMSF.
- You can’t acquire the SMSF property from any related party or other trustees.
Essentially, this means you are limited to purchasing a property to generate income: an investment property.
The benefit of using your SMSF to purchase an investment property is that you qualify for various investment property tax deductions, such as depreciation.
Claiming Tax Depreciation On Your SMSF Property
As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.
The Australian Tax Office (ATO) allows property investors, who generate income from their properties, to claim the depreciation as a tax deduction.
There are two types of depreciation deductions in the space of property investing, namely:
Division 43 – Capital Works Deductions
Division 43 Deductions refer to the depreciation of the structure of the building. The structure of a residential building, if constructed after September 1987, generally has an effective life of 40 years.
Division 40 – Plant and Equipment
The term “plant and equipment” refers to the fixtures and fittings found within the building.
These are generally known as easily removable assets and include items such as carpets and air conditioning units.
As with any other property investment, SMSF members qualify to claim depreciation deductions for capital works as well as plant and equipment items in your SMSF property.
To see what you can potentially claim on tax depreciation, access Duo Tax’s free depreciation calculator.
How Do You Claim Depreciation On SMSF Property?
To make the most of the deductions available to your SMSF property, you should consider having a quantity surveyor draw up a tax depreciation schedule to ensure that you maximise all your property depreciating claims.
The purpose of a depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim.
Are There Other Tax Benefits You’re Entitled To When Buying an SMSF Property?
One of the benefits of purchasing an investment property with your SMSF fund is the tax breaks available to you as a trustee:
- You are only required to pay 15% income tax on the rental income from your SMSF property. This is well below the marginal tax rates, which could amount to 45% depending on your income threshold.
- Investment properties held by the SMSF for longer than 12 months qualify for a capital gains tax (CGT) discount on the sale of the property. Your CGT liability will only be 10%. You can also further reduce your CGT liability by ordering a Duo Tax capital gains report.
- Once you retire and the fund starts paying out your pension, any rental income or capital gains resulting from SMSF property will be tax-free.
- If you borrowed money to purchase your SMSF property, the interest payments are tax-deductible to the fund.
Key Takeaways
To put it simply, an SMSF is a type of superannuation fund that you manage yourself instead of having a provider manage it on your behalf. This allows you the freedom to decide how you would like to manage your fund and what property you would like to invest in using the fund.
If you’re interested in learning more about how you can use your SMSF to purchase a property, get in touch with us today.
DISCLAIMER: “This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs”
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002
