When trustees of a Self-managed Super Fund (SMSF) choose to invest in real estate, there are tax implications.
As with any other property investment, SMSF trustees who invest in real estate are entitled 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.
To examine the difference that claiming depreciation for a property purchased by a SMSF, let’s take a look at an example.
A SMSF owns a two bedroom apartment purchased for $620,000 with 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 below show the difference claiming depreciation will make to a property owned in a SMSF.
Without claiming depreciation, the SMSF is only able to claim $7,924 and reduce the fund’s tax liability by just $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 per cent 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.
It is important that SMSF trustees always take advantage of the additional funds available via a depreciation claim.
Investors should also note that all transactions within an SMSF must be made and maintained at a distance. For example, if a SMSF owns residential properties, the trustee will not be able to personally rent them. The Australian Taxation Office sees this as a personal benefit. However, if a SMSF owns commercial properties, a trustee’s business may rent the premises provided the corporation pays what is seen to be a fair market value rent.
BMT Tax Depreciation advises any SMSF trustees who are considering investing in property to always seek the advice of an Accountant and to consult with a specialist Quantity Surveyor to find out how much depreciation can be applied to their SMSF investment property.
Article provided by BMT Tax Depreciation.
Please contact David Jepsen at Jack Lawrence if you are interested in this.
David Jepsen
P: 02 8207 6721
M: +61 (0) 412 355 364