Maximising your depreciating assets
A property purchased within an SMSF is considered to be highly beneficial, particularly when that property is a commercial premises rented from the SMSF by its members to use as their place of business.
But the benefits achieved through depreciation of the property are often overlooked.
Consider the following:
Bobby’s Plumbing SMSF purchased a property from which it intended to conduct its business. The premises consisted of an office, staff kitchen, bathroom and storage room for tools and parts. The purchase and additional costs incurred were:
Purchase element |
Cost |
Acquisition cost of the property |
$300,000 |
Incidental costs of purchasing the property |
$20,000 |
Outfitting of premises: computers, desks, chairs, cabinets etc |
30,000 |
Cost to improve or preserve the property: minor renovations – new office carpet, upgraded bathroom and kitchen facilities etc |
$15,000 |
Total Cost |
365,000 |
Bobby’s Plumbing Ltd rented the premises from the SMSF for $2,500 per month, which was treated as income by the SMSF.
Given that a number of upgrades were made before Bobby’s business could operate from the property, the trustees of the SMSF consulted a qualified quantity surveyor to have a depreciation report completed. As a result, the fund was able to claim $22,400 based on allowable depreciation rates.
At the end of the financial year, when the SMSF’s tax return was being prepared, the depreciation report was used as the basis for calculating the depreciated value of the property’s assets.
The property investment’s assessable income was calculated as follows:
Item |
Amount year 1 |
Assessable income on investment @ $2,500 per month |
$30,000 |
Depreciation calculated on property asset |
$22,400 |
Adjusted assessable income |
$7,600 |
Tax payable @ 15% fund rate |
$1,140 |
Without allowing for depreciation, the assessable tax would have been $4,500. This is a saving to the SMSF of $3,360 in that year.
There are two methods of calculating depreciation:
- Diminishing value: According to this method, the decline in the asset’s value is a constant proportion of its remaining value.
- Prime cost: According to this method, the value of the asset decreases uniformly over its lifetime.
See the Australian Taxation Office’s Guide to depreciating assets 2013 to assist in determining which method would best suit you. http://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind00342355n19960613.pdf
Other points to consider:
- Once a calculation method has been chosen for a particular asset, you cannot change your mind and use the other method later.
- Depreciation is most effective on properties that earn a higher rent.
- Depreciation on property is not limited to new buildings.
Please contact us on 02 9318 6400 or fred.tortora@surrypartners.com.au if you would like to know more about asset depreciation.
Sources:
www.aiqs.com.au Australian Institute of Quantity Surveyors
www.ato.gov.au Guide to depreciating assets 2012 – 13