Depreciation & Capital Works Deductions

Depreciation and capital works deductions permit owners of income-producing Australian property to claim, over time, the decline in value of the building structure and its plant and equipment, recognising that these assets wear out or reduce in value as they are used to produce assessable income. The regime is split between two distinct provisions of the Income Tax Assessment Act 1997 (Cth): Division 43, which addresses capital works such as the building structure, and Division 40, which addresses plant and equipment such as removable fixtures and appliances.

Depreciation claims are typically the second-largest category of deduction available to Australian property investors after loan interest, and accurate quantification requires specialist input. A quantity surveyor’s tax depreciation schedule, prepared by a suitably qualified professional, is the standard evidentiary basis relied upon by taxpayers and their accountants to substantiate depreciation claims to the Australian Taxation Office.

This node addresses the structure of the Division 40 and Division 43 regimes, the effective life and depreciation rate concepts that underpin them, the role of the quantity surveyor’s report, and the 2017 legislative changes that materially restricted plant and equipment depreciation claims for many residential property investors. It connects to the capital gains tax treatment addressed elsewhere in this sub-series, since capital works deductions claimed reduce the cost base used in calculating a subsequent capital gain.

This node covers:

• The Division 43 capital works deduction, the Division 40 plant and equipment depreciation regime, the role and content of a quantity surveyor’s tax depreciation schedule, low-value pooling, and the 2017 integrity measures restricting second-hand plant and equipment depreciation for residential property

This node does not cover:

• Calculating a depreciation entitlement for any specific property or asset
• Depreciation of commercial fit-out or specialised plant in detail
• Depreciation regimes applicable outside Australia

• Income Tax Assessment Act 1997 (Cth), Division 43

  Australian Taxation Office

  Establishes the capital works deduction for the structural cost of income-producing buildings, generally claimed at 2.5% per annum over 40 years.
• Income Tax Assessment Act 1997 (Cth), Division 40

  Australian Taxation Office

  Establishes the plant and equipment depreciation regime, including effective life determinations and the diminishing value and prime cost calculation methods.
• Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (Cth)

  Australian Taxation Office

  Restricts plant and equipment depreciation claims by subsequent owners of previously used residential property acquired after 9 May 2017.
• Tax Agent Services Act 2009 (Cth)

  Tax Practitioners Board

  Regulates the provision of tax agent services, relevant to the preparation and lodgement of returns incorporating depreciation and capital works deduction claims prepared with quantity surveyor input.

Depreciation and capital works deductions are typically established at or shortly after acquisition and then claimed annually over the life of the investment. Investors commission a quantity surveyor’s tax depreciation schedule following settlement, providing the technical basis their accountant relies upon each year. Where construction of a residential property began on or before 17 July 1985, no capital works deduction is available, materially reducing the total depreciation benefit obtainable and affecting the comparative after-tax return of older properties. Investors acquiring an established property after 9 May 2017 must exclude previously installed plant and equipment from depreciation claims, while capital works deductions and any plant and equipment they purchase new remain claimable.