1. The Two Deductions: Division 40 vs Division 43
Under Australian taxation legislation, tax depreciation claims are categorized into two separate statutory allowances with fundamentally different calculation rules:
Division 43: Capital Works Deductions
Division 43 relates to the structural elements of the building itself—the immutable brickwork, concrete foundations, load-bearing walls, roof trusses, tiles, and bathroom waterproofing. For eligible residential properties commenced after 15 September 1987, the ATO allows investors to claim a flat deduction of 2.5% per annum of the historical construction cost over a 40-year timeframe.
Division 40: Plant and Equipment Depreciation
Division 40 encompasses mechanical, electrical, and easily removable fixtures within the dwelling. These assets have shorter operational lifespans and depreciate at accelerated rates based on their effective life set by the ATO (e.g. carpets over 8 years, air conditioning systems over 10 years, hot water units over 12 years).
| Attribute | Division 43 (Capital Works) | Division 40 (Plant & Equipment) |
|---|---|---|
| Asset Types | Bricks, mortar, concrete slab, timber framing, roof, tiles, structural walls | Carpet, vinyl flooring, split-system AC, oven, dishwasher, blinds, light fittings |
| Deduction Rate | Fixed 2.5% p.a. over 40 years | Individual asset effective life (10%–25% p.a.) |
| Eligibility for 2nd-Hand Property | 100% Eligible (if built after 1987) | Ineligible for residential acquisitions after 9 May 2017 |
| CGT Cost Base Impact | Reduces property cost base upon future sale | Does not reduce building CGT cost base |
2. The Critical 2017 Budget Legislative Overhaul
On 9 May 2017, the federal government enacted major changes to Division 40 plant and equipment rules to stop successive owners from repeatedly depreciating second-hand fixtures:
- Second-Hand Residential Properties: If you purchase a residential property that was previously owned and lived in by someone else, you cannot claim Division 40 depreciation on the existing second-hand plant and equipment (e.g. previous owner’s oven or carpets).
- Brand New or Substantially Renovated: If you purchase a brand-new dwelling from a developer, or install brand-new plant and equipment yourself during ownership, Division 40 remains 100% tax-deductible.
- Division 43 Is Untouched: Second-hand properties continue to qualify for Division 43 Capital Works deductions regardless of how many times the property has changed hands, provided construction occurred post-1987.
Case Example: First-Year Cash Flow Boost from Quantity Surveying
An investor purchases a 4-year-old townhouse for $780,000. They commission a professional Quantity Surveyor to produce a comprehensive 40-year tax depreciation schedule ($650 tax-deductible fee).
- Division 43 Capital Works Allowance: $8,200
- Division 40 (New hot water system installed by investor): $1,400
- Total Year 1 Non-Cash Depreciation Deduction: $9,600
At a 39% marginal tax rate, this non-cash claim delivers $3,744 in real cash tax savings ($72/week) directly into the investor’s pocket without spending a single additional dollar on property outgoings.
Frequently Asked Questions
Does claiming Division 43 increase my Capital Gains Tax (CGT) later?
Yes. Under Section 110-45 of the ITAA 1997, all Division 43 deductions claimed during your holding period must be deducted from the property’s cost base when calculating your capital gain upon eventual sale. However, because individual property investors benefit from the 50% CGT discount on assets held over 12 months, claiming 100% deductions at your marginal rate today and paying discounted CGT in the future remains a massive net financial advantage.
Can an accountant create a tax depreciation schedule?
Under ATO ruling IT 2640, accountants and real estate agents are not legally recognized as having the construction estimating qualifications necessary to calculate historical construction costs. Only certified Quantity Surveyors (such as BMT Tax Depreciation or Washington Brown) can legally estimate historical construction values for properties where actual costs are unknown.
- Optimize holding cash flow by offsetting net rental property losses under negative gearing.
- Compare structural allowances when depreciating capital works on houses versus strata units.
- Consult statutory tax terminology in tax depreciation definitions in our glossary.