• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

SuperGuide

Superannuation and retirement planning information

  • SuperGuide Premium
  • Account
  • Log In
  • SuperGuide Premium
  • Account
  • Log In
  • How super works
    • Super for beginners
    • Super rules
    • Employers guide to super
    • Super contributions
    • Super and tax
    • Accessing super
    • Super news
    • Women and super
    • Super tips and strategies
    • How-to guides
    • Super quizzes
    • Superannuation Q&As
    • Superannuation glossary
  • Super funds
    • Best performing super funds
    • Super fund rankings
    • Best performing pension funds
    • Pension fund rankings
    • Super fund average returns
    • Super investing strategies
    • Comparing super funds
    • Choosing a super fund
    • Choosing an investment option
    • Super fund fees
    • Insurance and super
    • Super fund profiles
  • SMSFs
    • SMSFs for beginners
    • SMSF administration
    • SMSF checklists
    • SMSF compliance
    • SMSF investing
    • SMSF pensions
    • SMSF strategies
    • SMSF Q&As
  • Plan your retirement
    • Retirement planning for beginners
    • When should I retire?
    • How long will I live?
    • How much super do I need?
    • Will I get the Age Pension?
    • How much will I spend in retirement?
    • Financial advice
    • Retiring overseas
    • Preparing for retirement
    • Retirement planning strategies
    • Retirement calculators and reckoners
  • In retirement
    • Income in retirement
    • Super lump sums
    • Super pensions
    • Age Pension
    • Working in retirement
    • Life in retirement
    • Senior concessions and services
    • Aged care
    • Estate planning
    • Super death benefits

Home / SMSFs / SMSF investing / SMSFs and property

SMSFs: Investment property tax deduction mistakes to avoid

October 16, 2020 by Barbara Drury Leave a Comment

Reading time: 4 minutes

On this page

  • Investment property expenses your fund can claim
  • Investment property expenses your fund can’t claim
  • Tips to avoid common investment property tax deduction mistakes
  • The bottom line

One of the attractions of SMSFs for many people is the ability to invest directly in real property, both residential and commercial, something that is not possible in a public offer super fund.

According to the latest ATO statistics, in June 2020 real property accounted for almost 16% of SMSFs total asset allocation. Roughly two thirds of this, or $73.5 billion was in non-residential real estate while $39.1 billion was in residential real estate.  

Under the super rules, the property must be held in the name of the fund, not in the names of individual fund members. If funds are borrowed to fund an SMSF property purchase, they must be obtained under a limited recourse borrowing arrangement.


Need to know: One of the benefits of an SMSF for small business owners is the ability to lease a business premise owned by their SMSF. This comes with the requirement to ensure all lease payments are on commercial arm’s length terms.

However, due to COVID many SMSFs have provided a rent reduction or waiver to a related party tenant who can no longer afford the rent. Charging non-commercial rent would normally result in a contravention.

To the relief of many SMSF landlords, the ATO announced in April 2020 that it would not take action where an SMSF gives a related party tenant a temporary rent reduction. This will be in force for the 2019/20 and 2020/21 financial years.

Also, if you have a limited recourse borrowing arrangement and your lender has given your fund a loan deferral due to COVID, this must be documented so the auditor understands why loan repayments are not being made. Where the lender is a related party, loan deferrals must mirror commercial practices and be undertaken on an arm’s length basis.

Learn more about buying a commercial property and leasing it to your SMSF.


Well-chosen investment properties can help SMSFs to achieve capital growth over time, as well as rental income from tenants. SMSFs can also reduce their tax payable by claiming investment property expense deductions against the rental income they generate.

However, it’s important to understand what your fund can and can’t claim as investment property tax deductions.

Investment property expenses your fund can claim

The major investment property expenses that your fund can claim are:


Advertisement
SuperGuide Premium is ad-free
  • Borrowing charges, such as the interest charged on your loan to buy the property, and many associated loan fees and charges. However, expenses such as loan establishment fees, title search fees and the costs of preparing and submitting mortgage documents must be spread over five years if the amount is over $100.
  • Property management fees, such as:
    • council rates,
    • insurance,
    • body corporate fees,
    • the cost of advertising for tenants, and
    • the cost of using a property management service to manage the property on your behalf.
  • Legal expenses associated with the property, such as the costs of having tenant lease documents prepared.
  • Depreciation on investment property assets (such as its furniture and appliances). These deductions are usually spread over the cost of the asset’s “estimated useful life”.
  • Professional adviser fees, if you pay for the services of a financial planner, mortgage broker or tax agent to help you with your investment property decisions and management.
  • Repairs and maintenance costs, such as cleaning, painting, gardening, lawn mowing and pest control expenses.
  • Renovations and improvement costs that improve the property’s value, such as installing a new kitchen, bathroom or extension.

However, it’s important to understand that there are different tax implications for deducting renovation and improvement expenses compared to repairs and maintenance costs. Renovation and property improvement costs are treated as capital expenditures and can only be deducted at 2.5% each year over 40 years, unlike repairs and maintenance costs which can be fully deducted in the year they’re incurred.

Investment property expenses your fund can’t claim

The major investment property expenses your fund can’t claim are:

  • the purchase price of the property itself,
  • conveyancing fees associated with your purchase,
  • stamp duty associated with your purchase, and
  • building inspection costs associated with your purchase.

However, all these costs are included in your cost base when you sell the property, so they will reduce your potential capital gains tax (CGT) obligation.

Tips to avoid common investment property tax deduction mistakes

1. Make sure you have records for all your tax deduction claims

You must have invoices or receipts to substantiate any of your investment property tax deductions. This is more important than ever in the 2019/20 and 2020/21 financial years due to special arrangements due to COVID-19. Poor record-keeping not only causes delays completing your fund’s accounts, it may make your fund more difficult to audit and increase the risk of penalties for breaching the rules.

2. Understand the difference between property repairs and maintenance and property renovation/improvement

The ATO conducts routine audits of these types of claims as it’s common for mistakes to be made. One common mistake is for the total costs of renovations or improvements to be fully claimed in the year that they’re incurred, rather than a claim being correctly made over a number of years. .

SMSFs can claim an immediate deduction for repairs or maintenance costs to restore items broken, damaged or deteriorating in a property that is currently rented. However, repairs carried out for damages that existed prior to the purchase date of the property can’t be claimed as an immediate deduction, although you may be able to claim them over a number of years as a capital works deduction.

Compare super funds

Read more...

Advertisement

3. Don’t claim the full amount of loan establishment fees, title search fees and the cost of preparing and submitting mortgage documents

As mentioned earlier in this article, if these expenses are more than $100, they must be claimed over five years.

4. Don’t claim the cost of travelling to the investment property

If you need to visit a residential investment property for inspections, to collect rent or perform maintenance, it’s important to note that these expenses have not been allowable tax deductions since 1 July 2017. However, you can claim the cost of travel to a commercial property owned by the fund to collect rents, do repairs, or meet with tenants or letting agents.

5. Don’t claim expenses that are paid by tenants

You can’t claim a tax deduction for water, electricity, gas or other charges paid for by tenants.

6. Don’t claim costs relating to the sale of the investment property

You can’t claim real estate agent commissions, legal fees and other costs associated with the sale of an investment property. However, like purchase costs, these selling expenses can generally be included in your cost base when selling the property, reducing your potential capital gains tax (CGT) obligation.

7. Don’t incorrectly claim loan interest

If your SMSF has entered into a limited recourse borrowing arrangement (LRBA), you can only claim loan interest if the full amount of the loan is used for the purchase of the investment property.

For example, if you used only part of the loan for the investment property and invested the remainder on other fund investments, you would be in breach of the borrowing standards. Instead, any amount not used for the property purchase should be repaid to the lender.

Advertisement

The bottom line

It’s worth seeking independent professional advice when claiming tax deductions on SMSF investment property assets. This will help ensure your fund complies with relevant tax legislation and potentially save you time and money from costly mistakes in the long run.

The information contained in this article is general in nature.

Want to learn more about running an SMSF?

Become a SuperGuide Premium member and access expert guides for SMSFs, on topics such as costs, compliance, administration, investment, borrowing and pensions. Discover valuable super and retirement strategies, the most popular shares, managed funds and ETFs for SMSFs, the latest super rates and thresholds, contributions caps and more.

Includes more than 500 articles, how-to guides, checklists, tips, calculators, case studies, quizzes and a monthly newsletter.

Find out more


Learn more about SMSF investment in the following SuperGuide articles:

SMSF investment rules: Collectables and personal use assets

October 15, 2020

What are the SMSF borrowing rules?

August 6, 2020

How to create an SMSF investment strategy (including example documents)

August 6, 2020

How to achieve genuine diversification in an SMSF

August 3, 2020

How do SMSF retirees invest?

March 14, 2020

10 steps to buying a commercial property and leasing it to your SMSF

February 12, 2020

What on earth is an in-specie transfer?

January 15, 2020

How to invest in infrastructure through an SMSF

October 1, 2019

ETFs: How do I use them and what do they cost?

June 19, 2019

SMSF guide to hedging

May 1, 2019

SMSFs and property: A Super Guide

April 5, 2019

The definitive SMSF guide to franked dividends

April 2, 2019

SMSF investment rules: What every trustee should know

February 15, 2019

Learn more about SMSFs and property in the following SuperGuide articles:

10 steps to buying a commercial property and leasing it to your SMSF

February 12, 2020

SMSFs and property: A Super Guide

April 5, 2019

Related topics

SMSF investing SMSFs SMSFs and property

IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

© Copyright SuperGuide 2009-21. Copyright for this article belongs to SuperGuide Pty Ltd, and cannot be reproduced without express and specific consent. Learn more

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

How super works
Super for beginners
Super rules
Employers guide to super
Super contributions
Super and tax
Accessing super
Super news
Women and super
Super tips and strategies
How-to guides
Super quizzes
Superannuation Q&As
Superannuation glossary
Super funds
Best performing super funds
Super fund rankings
Best performing pension funds
Pension fund rankings
Super fund average returns
Super investing strategies
Comparing super funds
Choosing a super fund
Choosing an investment option
Super fund fees
Insurance and super
Super fund profiles
SMSFs
SMSFs for beginners
SMSF administration
SMSF checklists
SMSF compliance
SMSF investing
SMSF pensions
SMSF strategies
SMSF Q&As
Plan your retirement
Retirement planning for beginners
When should I retire?
How long will I live?
How much super do I need?
Will I get the Age Pension?
How much will I spend in retirement?
Financial advice
Retiring overseas
Preparing for retirement
Retirement planning strategies
Retirement calculators and reckoners
In retirement
Income in retirement
Super lump sums
Super pensions
Age Pension
Working in retirement
Life in retirement
Senior concessions and services
Aged care
Estate planning
Super death benefits
Advertisement
Compare super funds

Kickstart your retirement planning

Try our free 7-day email series on planning your retirement, including how much super you’ll need, when you can retire and a quiz to test what you’ve learned.

Learn more

Footer

Important: Disclaimer

All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs.

You should consider whether any information on SuperGuide is appropriate to you before acting on it.

If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

Learn more

About SuperGuide

SuperGuide is Australia’s leading superannuation and retirement planning website. Learn more

Superguide Pty Ltd ATF Superguide Unit Trust as a Corporate Authorised Representative (CAR) is a Corporate Authorised Representative of Independent Financial Advisers Australia, AFSL 464629

  • Contact us
  • Advertise on SuperGuide
  • Careers

Before using this website

  • New to SuperGuide?
  • Terms and Conditions of Use
  • Financial Services Guide
  • Privacy Policy and Privacy Collection
  • Copyright Policy
  • Editorial Policy and Complaints
  • Disclaimer

  • SuperGuide Premium
  • Subscriber feedback
  • Sitemap