Division 40 vs. Division 43 – How to Maximise Your Tax Depreciation

When it comes to claiming depreciation on your rental properties, two things will be accounted for in a report. These are Division 40 (Plant and Equipment) and Division 43 (Capital Works). Knowing the difference between these two is key to getting the most out of your tax deductions. 

What is Division 40? 

Plant and equipment refer to items that are fixtures and fittings, also known as easily removable assets. Each item has an effective life as set out by the ATO in the document Taxation Ruling TR 2019/5 – Income tax: effective life of depreciation assets.  

With Division 40 items you can depreciate them using either the diminishing value or prime cost method. Although the end value is the same, many people choose the diminishing value method as it allows items to depreciate faster in the first few years. For example: 

• A dishwasher has an effective life of 10 years. It depreciates at 20% of its current value per annum until it reaches a value below $1,000. Once below $1,000 the depreciation rate is 37.5% under low-value pooling. 

Low-Value Pool 

A low-value asset is an asset that has been depreciated over one or more years and now has a written-down value of less than $1,000 but only if you have previously worked out deductions for it using the diminishing value method.  

You calculate the depreciation of all assets in the low-value pool at 37.5%. If you acquire an asset and add it to the pool during an income year you calculate its deduction at 18.75% (half the pool rate) in that first year regardless of when during the year you add it. 

Immediate Write-Off 

Plant and equipment items with a cost of $300 or less are eligible for an immediate full deduction. 

What is Division 43? 

Division 43, also known as the Capital Works Deduction or Building Write-Off, allows property owners to claim tax deductions for the wear and tear of the structural elements of income producing properties. This includes buildings and structural improvements such as walls, roofs and driveways.  

The deduction is 2.5% per annum for up to 40 years after construction is completed, depending on when construction started. For example, residential properties built after September 15, 1987, are eligible for this deduction. 

Where Can You Apply Capital Works Deductions? 

Division 43 refers to the depreciation of the structure of a building—objects that aren’t removable. Capital works include: 

• Buildings or extensions 

• Alterations or improvements to a building 

• Structural improvements 

• Earthworks for environmental protection 

Residential properties built after September 15, 1987, are eligible to claim Division 43 capital works deductions over a 40-year period at a straight-line rate of 2.5% per annum.  

When construction costs are unknown a qualified specialist such as a Quantity Surveyor will estimate them. Examples of capital works include: 

• Driveways 

• Fencing 

• Garage 

• Paint 

• Roofing 

• Tiling 

• Walls 

Preliminary expenses such as surveying and engineering fees are included in a capital works schedule. 

Division 40 vs. Division 43: Key Differences 

While both divisions offer tax deductions for property investors, they cover different aspects: 

Understanding these differences will help you get the most out of your tax benefits by claiming in the right division. 

How Renovations Affect Your Depreciation Claims 

Renovations can impact your Division 43 claims in two ways: 

• New Construction Costs: Renovations such as extensions or structural upgrades are new capital works and can be depreciated at 2.5% per annum. 

• Residual Value Write-Offs: If old structures are demolished during renovations the undeducted value can often be written off as an immediate deduction. 

For example:  

If you replace an old roof during renovations with a new one costing $20,000: 

• The new roof is categorised under Division 43. 

• The undeducted value of the old roof can be written off in the same year. 

Recent Legislative Changes to Depreciation Rules 

According to the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, as detailed on the Australian Taxation Office website: 

For residential properties purchased after May 9, 2017, second-hand plant and equipment items cannot be claimed under Division 40 unless they are acquired through a business entity.  

This legislative change was specifically introduced to address concerns about excessive depreciation deductions in the residential property sector.  

However, it’s important to note that these amendments do not affect Division 43 claims for structural elements and capital works, which remain claimable for eligible properties. 

These changes were outlined in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, Schedule 1, and were formally enacted by Parliament to ensure the integrity of the tax system while maintaining appropriate deductions for property investors. 

Get the Most Out of Your Depreciation 

Here’s a scenario of how you can get the most out of your depreciation: 

John purchased a residential property that was built in January 1990. The original construction cost was $300,000. Through a tax depreciation schedule, John was able to claim Division 43 deductions of $7,500 per year (calculated at 2.5% of the construction cost). Over just five years, this added up to significant tax savings of $37,500. 

Similarly, Sarah decided to renovate her investment property’s outdated kitchen, investing $50,000 in the upgrade. Not only could she claim Division 43 deductions of $1,250 per year on the new kitchen (2.5% of the renovation cost), but she also benefited from additional tax savings through the residual value write-off of the demolished kitchen components. 

These scenarios show how understanding and properly claiming depreciation can lead to substantial tax benefits for property investors.  

Key Takeaways 

• Division 43 (Capital Works) allows for a 2.5% annual depreciation claim on structural elements built after September 15, 1987, covering items like walls, roofs, and driveways over a 40-year period 

• Division 40 (Plant and Equipment) covers removable fixtures and fittings, with each item having an ATO-specified effective life and depreciating at different rates using either diminishing value or prime cost methods 

• Items valued under $300 qualify for immediate write-off under Division 40, while assets with a written-down value below $1,000 can be placed in a low-value pool with a 37.5% depreciation rate 

• For properties purchased after May 9, 2017, second-hand plant and equipment (Division 40) items cannot be claimed unless acquired through a business entity, though Division 43 claims remain unaffected 

• Renovations can provide additional depreciation benefits through both new construction costs (2.5% per annum) and potential immediate write-offs for demolished structures 

• A qualified Quantity Surveyor can estimate construction costs when unknown and ensure your depreciation schedule maximises available tax deductions while maintaining ATO compliance 

Ready to unlock the full potential of your property’s tax benefits? Reach out to us today and let our experts guide you through the process of claiming every deduction you’re entitled to. Your investment deserves nothing less than expert care and attention to detail.