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Every SMSF which has borrowed to purchase property should have a depreciation schedule but many trustees (and their accountants and advisers) continue to overlook the benefits of depreciation.
The best way to ensure SMSF clients are claiming the maximum deductions allowable for expenses related to property held within their super fund, is to purchase a Quantity Surveyors Report, based on a physical inspection of the property.
A physical inspection by a tax depreciation expert ensures that all depreciable buildings, structural improvements and plant are identified and measured professionally and each item of plant identified.
Our Quantity Surveyors Report, cost only $495 and can be emailed to the client within 10 working days. It is the best, most reliable way to ensure an SMSF's depreciation schedule is accurate and comprehensive. Anything less won't do the job and the cost of the QS report can also be claimed in the year you pay for it!
The main drawback with purchasing a QS report that is not based on a full physical inspection of the property is that it may not be accurate. In fact many reports based on non-physical inspections include a disclaimer that the report may contain inaccuracies. That is why we recommend that you do not rely on such reports as the basis for calculating your depreciation deductions.
Only a full physical inspection of the property to identify plant and measure the building size etc can provide the most accurate QS report upon which to base a depreciation schedule.
Why claim depreciation?
Claiming depreciation expenses in an SMSF tax return on any income-producing property increases the investor's return on investment and there is no better reason to make such a claim.
Depreciation expenses claimed as tax deductions -- combined with claims for additional holding costs such as mortgage interest, repairs and strata costs -- can help the SMSF reduce net rental income from the property. As a result, the fund will pay less tax and its cash flow will be improved.
What can be claimed?
Any property investor can claim two types of tax deduction related to the property. The first is a capital works deduction for building. The second is depreciation or a decline in the value of plant (articles and machinery).
These deductions are allowed in recognition that the value of an asset will decline over time until they reach the end of their effective life. Hence, their cost can be written off over their effective life and this is what is known and depreciation.
To learn more about our QS Report click here
Capital works deductions
Capital works deductions are available to property investors for costs related to the construction of a building or structural improvements. It is a relatively complex area and quite difficult to calculate. Depreciation rates can vary depending on when construction commenced and the type of building works used.
Capital works depreciation has to be based on an estimate of the cost at the time of construction, not the price you paid when you purchased the property (if you didn't have it built). That's why it is essential to accurately measure the building and have expert knowledge about factors such as builder margins.
The following capital works deductions can be claimed as an income tax deduction, usually at the depreciation rate of 2.5% to 4% per year in the 40 years following construction:
1. Building construction costs
2. The cost of altering a building (extensions, garage, patio, a new bathroom or kitchen
3. Cost of capital improvements to the surrounding property: fences, retaining walls, carports, garages, gazebos
You can only claim capital works deductions for income-producing residential properties constructed after 17 July 1985. If you purchased the property ready-built, it is particularly important to obtain a Quantity surveyors Report. An appropriately-qualified Quantity Surveyor will be the only professional with the knowledge and expertise to obtain the historical information required to make a legitimate claim, such as:
· The date construction commenced
· Details of the type of construction
· Date of completion
· Who carried out the construction
· Construction cost at the time of building
· Details of the period during the year that the property was used for income-producing purposes.
What about plant?
Depreciation of plant and equipment can be claimed at a higher rate than capital works. A qualified Quantity Surveyor will make it much easier to identify which items are classified as articles and machinery and which are structural.
What can be defined as an article? A bookcase, curtains or a desk are three examples. If an article forms part of the physical structure of the premises, it can't be defined as an article, such as insulation batts or floor tiles. Items of machinery are considered to be plant whether or not they form part of the building.
The ATO gives investors the option of two methods for calculating depreciation on plant and machinery:
1. Prime cost: this method assumes the item undergoes even wear and tear throughout its useful life. It's calculated by dividing 100% of the asset's useful life by years. For instance, if the useful life of the asset is deemed to be 10 years, the prime cost depreciation rate for each of those 10 years will be 10%
2. Diminishing value: this method assumes most of the wear occurs in the earlier years of the asset's useful life. It's calculated by dividing 150% by an asset's useful life in years. For example, the depreciation rate for an asset deemed to have a useful life of four years will be 37.5%.
Low-value assets
If an asset cost less than $300, total depreciation can be claimed in the first year. You can also 'pool' low-cost assets with low-value assets. A low-cost asset is a depreciating asset that cost less than $1,000 in the income year in which you start to use it or install it ready for use. A low-value asset is a depreciating asset where the deduction can be claimed at a diminishing value rate of 37.5%.
Why SMSFs shouldn't be without a QS report
Ordering one of our expert Quantity Surveyors Reports means you can rest assured that correct asset rates are used so you can maximize your depreciation claims whilst avoiding claiming for items that cannot be depreciated. We keep ourselves up to date with all ATO rulings.
Our QS report commences from the settlement date and remains valid for the lifetime of the investment. Please not that we do recommend updating the report in the event of new capital works or the replacement of articles.
Our Quantity Surveyors Report includes a complete and reliable depreciation schedule for capital allowances and a separate schedule for plant for the decline in value of depreciable assets. Reports are prepared by specialists who are tax agents and members of the Institute of Quantity Surveyors (AQIS).
Finally, our unique electronic registration technology means we can provide the fastest service possible at a reasonable price and users have online, 24/7 access to their reports for claims for future years.
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