Property depreciation in a trust
A trust that owns investment property can claim depreciation on the same basis as an individual investor. The deductions reduce the trust's net income — which means less income is distributed to beneficiaries and taxed in their hands.
How it works
Division 43 — Capital works: The trust claims 2.5% per year of the construction cost of any post-1985 building structure. This is claimed in the trust's tax return.
Division 40 — Plant and equipment: Fixtures and fittings are depreciated using the ATO's effective life rulings. The same second-hand asset restriction (for residential property purchased after 9 May 2017) applies to trusts as to individuals.
Trust income and distribution
Depreciation reduces the trust's taxable net income before it is distributed. If the trust generates $50,000 in rental income and $20,000 in depreciation deductions, the taxable net income is $30,000. This $30,000 is distributed to beneficiaries and taxed at their marginal rates.
This is one of the advantages of a trust: beneficiaries with lower marginal rates (an adult child or lower-income spouse) pay less tax on the income.
Trust losses from depreciation
If depreciation and other deductions exceed the rental income, the trust has a net loss. Trust losses cannot be distributed — they are quarantined inside the trust and carried forward. This is the key limitation of using a trust for negatively geared property.
The 50% CGT discount
When the trust sells property at a capital gain and has held it for more than 12 months, the 50% CGT discount can be passed through to individual beneficiaries. Company beneficiaries do not receive the discount.
Discretionary trusts vs unit trusts
Discretionary trust: The trustee has discretion over who receives the income each year — useful for directing income to the lowest-taxed beneficiary each year.
Unit trust: Income is distributed proportionally to unit holders — useful for fixed ownership structures, co-investment, and for certain financing arrangements.
Both can claim depreciation in the same way.
Quantity surveyor schedule
A depreciation schedule prepared by a quantity surveyor for a trust-owned property works identically to one for an individual-owned property. The trust provides the schedule to its accountant, who incorporates the figures into the trust tax return.