Depreciation allowances and tax-deferred income

Own units in a unit trust that owns a property?

One thing I couldn’t get my head around was depreciation allowances and they effect cash flow. I found this which should help:

People who hold investments in property, either directly or indirectly through listed property trusts or managed funds are able to benefit from depreciation allowances. These are of two types, being depreciation on buildings and depreciation on plant and equipment in buildings.

Depreciation allowances on buildings results in a part of the rental income being tax free to the investor. Depreciation allowances on plant and equipment results in tax deferred income. Tax deferred income is tax free at the time it is received, however when the property (or property trust or fund) is sold, the profit made on the sale is increased by the amount of tax deferred income that was previously received, resulting in a higher capital gains tax liability.

The reason the CGT is higher when you sell is because your cost base slides down towards zero as your tax-deferred income flows through to you over time, but the value of the property will (hopefully) increase which means the gap between them is BIGGER. You will therefore pay more CGT when you sell.