Buying property through a self-managed super fund (SMSF) comes with a lot of paperwork. Loan approvals, valuations, leases and audit requirements all land at once, and by settlement most trustees are focused on one thing: keeping the fund compliant.

Then the accountant asks a simple question. Is there a depreciation schedule for the property? For many trustees, it is the first time anyone has raised it, and it is an easy one to miss with so much else on the table.

Depreciation is a non-cash deduction, so nothing leaves the fund’s account to prompt the question. Yet for SMSF property that earns rent, tax depreciation can be one of the more valuable deductions on the return. The rules are mostly familiar, with a few twists that only apply to funds.

TL;DR

  • An SMSF can claim depreciation on its property, with the deductions sitting in the fund’s return.
  • Claims split into Division 43 capital works and Division 40 plant and equipment.
  • SMSFs are not exempt from the 2017 limits on second-hand plant and equipment in residential property.
  • Related-party, borrowing and pension phase rules all affect what a fund can claim and what it is worth.
  • A schedule from a certified quantity surveyor gives the fund’s accountant and auditor figures they can rely on.

Why SMSFs Can Claim Property Depreciation

An SMSF is a taxpayer in its own right. When your fund buys SMSF property and leases it out, the rent is fund income, and the costs of earning that income are generally deductible. Depreciation is one of those costs, even though no money changes hands when it is claimed.

That means the claim belongs to the fund, not to you personally. The figures come from the fund’s depreciation schedule, and they flow into the SMSF annual return. Your own tax return is not affected, which surprises members who also hold property in their own name.

Where things need more care is the sole purpose test under the Superannuation Industry (Supervision) Act 1993 (SIS Act). The property must exist only to provide retirement benefits, which shapes who can live in it, rent it or work on it. The lease also has to sit at market rent on arm’s-length terms for any deduction to stand.

Division 40 and Division 43 for SMSF-Held Property

SMSF property depreciation uses the same two categories as any other investment property. The split matters, because each category is claimed differently and only one is affected by the 2017 change that catches so many trustees out.

  • Division 43 capital works: the structure itself, such as walls, floors, roofing and anything permanently fixed. Deductions are spread over decades, later improvements add to them, and they reduce the property’s cost base for when the fund sells.
  • Division 40 plant and equipment: removable items that wear out sooner, like carpets, blinds and air conditioning. These usually deliver the bigger deductions in the early years of ownership.

Plant and equipment is where that change bites. Since 9 May 2017, rules administered by the Australian Taxation Office (ATO) generally stop claims on existing plant and equipment in a second-hand residential property.

It is easy to assume the SMSF depreciation rules carve your fund out of that limit. They do not, because the ATO’s second-hand asset rules only exempt super funds that are not self-managed. An established home bought by your fund can still claim the building itself and any new assets it installs.

What Makes SMSF Depreciation Different

The categories stay the same, but the rules wrapped around SMSF property change how they play out. Four areas matter most: who the fund deals with, the type of property it holds, how it paid for it, and where members are in their super journey.

Related Parties and Arm’s-Length Terms

Your fund generally cannot buy residential property from a related party, such as a member or a member’s relative, or lease it to one. Nobody connected to the fund can live there, and the property cannot double as a holiday home.

Depreciation also relies on the property genuinely earning income on commercial terms. If the rent slips below market or a relative moves in, losing the deductions becomes the smaller problem, because the fund itself can fall out of compliance.

Residential and Commercial SMSF Property

Commercial property is where those related-party rules loosen. Under the business real property exception, your fund can buy premises from a member and lease them back to the member’s business. The rent must be at market rates, and the lease must be documented.

The 2017 second-hand rule only applies to residential premises, so existing plant and equipment in a commercial building can generally still be claimed. Fit-outs, lighting and specialised equipment often make commercial property depreciation the larger part of the claim. That alone makes commercial SMSF property worth a proper assessment.

Borrowing Through an LRBA

Many funds buy through a limited recourse borrowing arrangement (LRBA). A holding trust keeps legal title until the loan is repaid. For tax purposes, though, the fund is treated as the owner, so the fund still claims the depreciation.

The loan does limit what you can do. Borrowed money cannot pay for improvements, and the property cannot become a different kind of asset while the loan is in place. Repairs and maintenance are fine, so it pays to know the difference before any work begins.

Pension Phase

Pension phase changes what the claim is worth. Once fund income supports retirement pensions, that income becomes tax free, and deductions linked to it cannot be claimed. The ATO’s guidance on SMSF deductible expenses explains how to split them, and depreciation usually does its best work while members are still building their balance.

Common Compliance Considerations for Trustees

Those rules turn into a few checks that come up again and again when a fund holds SMSF property. None of them are complicated, but each one has a knock-on effect on the depreciation claim if it is missed.

  • Related-party leasing: residential property cannot be leased to members or their relatives. A commercial lease to a related business needs market rent and proper documentation.
  • In-house asset rules: dealings with related parties, including some leases and investments, are limited. Check with your adviser before signing anything with a related party.
  • Records to keep: the depreciation schedule, the lease, rent and expense records, contracts for any works, and evidence that the rent reflects the market.
  • Updating after works: a new kitchen, roof or fit-out changes the numbers. An out-of-date schedule can mean missed deductions or figures that do not match the fund’s records.

Why an AIQS-Certified Schedule Matters for SMSF Property

Good records matter because every SMSF is audited each year by an approved SMSF auditor. Deductions in the fund’s return need documentation that stands up to that review, and a rough estimate is not documentation, however reasonable it looks.

That can be a problem, because established SMSF property often comes with few building records. Where those records are missing, a qualified quantity surveyor can estimate construction costs using recognised methods. That gives the auditor something concrete to check.

Errors also cost more inside a fund. A mistake touches every member’s balance, and fixing it can mean amended returns and questions at the next audit. A surveyor certified by the Australian Institute of Quantity Surveyors (AIQS) and registered with the Tax Practitioners Board (TPB) helps avoid both.

How ACP Supports SMSF Trustees

ACP has prepared depreciation schedules for residential and commercial property for more than 35 years, across over 10,000 projects. Its quantity surveyors are AIQS-certified and TPB-registered, ACP is a member of the National Tax & Accountants’ Association (NTAA), and more than 1,000 chartered accountants rely on its reports.

For your fund, that experience means a schedule built with the audit in mind. Every tax depreciation report passes through the TAXBACK1000 quality assurance system before it leaves the office, and the team works directly with the fund’s accountant. 

Pricing is fixed-fee, so the cost is clear before work begins. Every report is also backed by a money-back guarantee, which puts the risk of an error on the surveyor rather than on the fund and its members.

Getting Reliable Numbers for an SMSF Property

How depreciation in an SMSF plays out depends on the property type and how and when the fund bought it. Work done since, and where members are in their super journey, matter just as much. No general figure can capture all of that.

Ordering a schedule soon after settlement means deductions are ready for the fund’s first return. A property-specific assessment gives the real answer, and a fixed-fee quote shows the cost before any work starts. From there, the schedule sits with the fund’s records for every audit that follows.

This article is general information rather than advice for any particular fund. Your accountant or SMSF adviser can confirm how these rules apply to your property, your members and the stage your fund is at.

Frequently Asked Questions

Does SMSF property depreciate the same way as personally owned property?

The same Division 40 and Division 43 rules apply, so the building and its assets lose value in the same way. What changes is who claims the deduction, which is the fund rather than its members, and the SMSF rules that sit around the property.

Who can claim the deduction when a fund uses an LRBA?

The fund claims the depreciation, because tax law treats it as the owner while the holding trust keeps legal title. The schedule is prepared for the fund’s return, and the loan does not change which categories can be claimed.

Can an SMSF claim depreciation on plant and equipment in an established residential property?

Claims are generally limited to new assets the fund installs after buying, since SMSFs are not exempt from the 2017 second-hand rule. Capital works deductions on the building are unaffected, so an established home can still carry real depreciation value.

Is depreciation still worth claiming once members move into pension phase?

Its value falls as more of the fund’s income becomes tax free, because deductions linked to that income cannot be claimed. The accountant works out the split each year, and the schedule stays useful while any members remain in the accumulation phase.

When should a fund order a depreciation schedule?

Soon after settlement is best, so the schedule is ready for the fund’s first annual return and no deductions are missed. A new schedule is also worth ordering after major works, such as a renovation or fit-out, so the figures stay accurate.