While owning business property has always been a popular strategy, with the changes to the rules around super loans (Limited Recourse Borrowing Arrangements), more trustees are choosing to own property directly through their SMSF. Potentially, the taxation benefits come from holding an investment asset in a lower or zero tax vehicle, rather than claiming tax deductions. However, it can still be important to optimise these deductions.
And of course, deductions are only available to those funds paying tax (ie those in accumulation mode). If your SMSF is in pension mode and the property is supporting the payment of the pension, then the SMSF won’t be paying any tax – so there are no deductions that can be claimed.
Here’s a quick guide to some of the more common property deductions your fund may have.
These are the purchasing costs, which you incurred when you bought the property. In addition, a capital cost includes capital improvements (such as extensions, pergolas, driveways, etc.) and also costs of selling. Careful distinction must be made between the replacement of an item of plant (such as replacing the hot water service) and an improvement (such as rendering the brickwork).
You cannot claim capital costs as a tax deduction against earned income. You can, however, offset them against a capital gain made at the point of sale. This is done by adding the cost of these items to the purchase price of the property – making the ‘cost base’ of the property higher.
While you, most likely, will not be making any claims for capital costs unless you have disposed of a property, if you are within the first five years of having purchased, you may still have borrowing costs which can be claimed.
Revenue costs are all of those costs, which are incurred in the process of earning the rental income, and it’s these costs, which make up part of your deductions.
They include, but are not limited to:
- Advertising for a tenant.
- Loan interest and bank fees.
- Body corporate fees, rates, energy and water bills.
- Land tax.
- Cleaning, mowing, gardening, repairs and maintenance.
- Building, contents, liability and landlord’s insurance.
- Accountancy fees, property management fees, legal fees (not relating to the actual purchase).
- Lease costs.
- Pest control.
- Quantity surveyor’s fees.
- Security patrol fees.
- Stationery, postage and telephone.
- Travel expenses when inspecting the property.
The list goes on, and your accountant will be able to tell you what’s included as a viable property expense.
You cannot claim:
- Stamp duty on conveyancing.
- Expenses on the property not actually paid by you, such as water and electricity paid by the tenant.
- Expenses that do not relate to the renting of the property.
In some cases, expenses must be apportioned between deductible and non-deductible. For example, where you combine a holiday with inspecting your fund’s property, you must only claim a portion of the travel costs.
Depreciation can be divided into two sections – depreciation on plant and equipment (furniture, fixtures and fittings) and depreciation on the building (capital works deductions).
Depreciation on furniture, fixtures or fittings
Where an item of furniture, or a fixture or fitting not a part of the building, is used to produce an income, then the cost of its depreciation may be claimed against earned income.
The rate at which you can depreciate an item will depend on its effective life, and is anywhere between one and 20 years. The ATO has determined the average effective life on a long list of common items, however the taxpayer may make his or her own estimate of effective life, if it can be substantiated with evidence.
Capital works deductions
As a rule of thumb, if the item can be moved, then it is an item of plant and can be claimed as plant and equipment (fixtures, fittings and furniture) depreciation. If, on the other hand, it is part of the setting for a rent-producing activity, rather than a fixture, fitting or piece of furniture, then it would be claimed as a part of the capital works deductions.
These items may include things such as:
- In-ground swimming pools, saunas and spas.
- Plumbing and gas fittings.
- Garage doors, roller shutters and skylights.
- Sinks, tubs, baths, washbowls and toilets.
Capital works deductions include allowable deductions where you may claim the costs of construction of a building over a set period of time. The amount you can claim is limited (of course) to 100% of the cost of the construction.
Working out the amounts
There are two ways in which you can claim the capital works depreciation—the prime cost method or the diminishing value method. As each of these methods require quite a complicated formula to calculate, it is far better for you to ask your accountant which method would be most advantageous to your personal circumstances. The Australian Tax Office website allows you to download some great information on these—they also have available a guide to depreciation, which includes worksheets for calculating depreciation.
There are varying rules which apply depending upon when you acquired the property, and so checking with the Tax Office website, or your accountant, is the best way to know how your property will be treated.
If you do not know the original construction costs, or the value of any plant and equipment, now is the time to retain the services of a ‘quantity surveyor’. The job of the surveyor is to provide for you what is known as a ‘depreciation schedule’. This schedule will not only make an estimate of what the construction costs would have been, but it provides for you a list of all of the furniture, fixtures and fittings, and gives each of them a value at the time of your purchase.
A quantity surveyor will charge you a fee (usually around $600), but this fee is well worthwhile and tax deductible.
You must keep all records and have them available in case the tax office does an audit.
With Paul Rickard
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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