All Topics / Legal & Accounting / Depreciation inside a Family Trust

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  • Profile photo of NL888NL888
    Participant
    @nl888
    Join Date: 2023
    Post Count: 0

    Hi guys, I’m new to the forum and this is my first post so go easy on me as I’m still learning 😆

    So my question is why would I claim depreciation on a property inside a trust if it reduces your taxable income?

    E.G The trust owns an investment property that is positively geared returning $20,000 before tax. Now if I was to claim depreciation of $10,000 that would reduce the trusts income to $10,000. The trust then distributes the $10,000 to my wife who is a stay at home mum with no income so she would pay no tax as she’s under the tax free threshold.

    Now if the trust was not to claim the depreciation and distribute the full $20,000 to my wife she’d only pay $342 in tax and be in front an extra $9658, so in total she would receive $19,658.

    Is this correct or I am missing something? To my understanding it seems like trying to save on tax is worse then making more money and paying tax on the higher earnings.

    Thanks in advance

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Hi,

    In the circumstance you describe the benefit of the tax shield from depreciation does seem marginal, especially if the extra income could justify higher borrowings.

    Not everyone has a tax-free beneficiary to distribute to, and hence the depreciation tax shield is more beneficial.

    Some time ago I wrote an article on the deception of depreciation. Have a read of it here:

    https://www.propertyinvesting.com/depreciation/

    Bye,

    – Steve

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of NL888NL888
    Participant
    @nl888
    Join Date: 2023
    Post Count: 0

    Thanks Steve, appreciate the quick reply 👍

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi NL888,

    Good to see that Steve has replied already.  One other thing that is rarely mentioned (I first heard it from Steve MANY years back) is that Depreciation deductions are added back on sale so that you end up paying for those earlier deductions anyway (perhaps via CGT??)  I am not sure on that, but it could also be a good reason to NOT claim deductions as you go.  I think the term used may have been “Balancing Charge” or similar…..

    Sounds to me that your Trust is working well in your particular situation.  As Steve said, depreciation can be useful for some, but not all.  Sounds to me like you are doing fine as you are.  Of course, as I am not an Accountant or anything, my thoughts are little more than encouragement, but do check with your favourite adviser re any/all of this.

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If the trust’s income is going to be less than the tax free threshold there may be no tax benefit for the trust to claim depreciation. but it would still be added back to the cost base on sale, but there is an exception to this if the taxpayer doesnt know what the depreciation values are so the trust shouldn’t get a depreciation schedule if it hasn’t already.

     

    see

    Practice Statement Law Administration
    (General Administration)
    PS LA 2006/1 (GA)
    Calculating cost base of CGT asset where there is insufficient information to determine any Division 43 capital works deduction

    https://www.ato.gov.au/law/view/document?locid=%27PSR/GA20061/NAT/ATO%27

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

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