Division 40 vs Division 43: Differences & Tax Deductions

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 Are Division 40 Depreciating Assets? 

Divsion 40 depreciating assets or plant and equipment refer to items that are considered to be fixtures and fittings, also known as easily removable assets. Each item has an effective life as set out by the Australian Taxation Office (ATO) in the Commissioner’s effective life determination, currently the Income Tax Assessment (Effective Life of Depreciating Assets) Determination 2025.

How Do You Depreciate Division 40 Assets?

Under Division 40 of the Income Tax Assessment Act 1997, you can depreciate eligible plant and equipment assets (like carpets, blinds, hot water systems, or ovens) using one of two methods:

1. Diminishing Value Method

This method accelerates depreciation, allowing you to claim a higher deduction in the earlier years of an asset’s effective life.

It assumes that assets lose more of their value earlier on, so the depreciation amount is calculated on the declining balance of the asset each year (rather than the original cost).

Example:
If you bought a $1,000 asset with an effective life of 5 years:

• Year 1 might give you a deduction of $400
• Year 2 would give you a deduction of $240
• Year 3 would give you a deduction of $144, and so on

This is ideal for investors wanting to maximise their upfront tax deductions and improve cash flow in the early years of owning a property.

2. Prime Cost Method

Also known as the straight-line method, this spreads the depreciation evenly over the asset’s effective life.

You claim the same deduction amount each year, based on the asset’s original cost.

Example:
Using the same $1,000 asset over 5 years, you’d claim $200 each year.

This method is more predictable and may suit investors who prefer stable income tax deductions over time, particularly those with long-term holding strategies.

Which Method Should You Use?

The choice depends on your investment strategy and when you want to access the deductions:

• Diminishing Value: Greater deductions early on = better short-term cash flow
• Prime Cost: Consistent deductions = better for long-term forecasting

You must nominate your chosen method in your first tax return for the property, and once selected, it cannot be changed for that asset.

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. For the full detail, see our guide to the Division 40 plant and equipment rules.

How Do You Claim Capital Works Deductions (Division 43)?

Division 43, also known as the Capital Works Deduction, allows property owners to claim tax deductions for the wear and tear of the structural elements of income producing properties. This includes buildings and capital expenditure for structural improvements such as walls, roofs and driveways. For every construction date and rate, see our guide to capital works deduction rates.

How are Capital Works Deductions Calculated? 

Capital works deductions under Division 43 are calculated as a fixed percentage (usually 2.5%) of the construction cost of the building or structural improvement, claimed each year over a set period (up to 40 years).

This means you can’t claim the deduction based on the property’s market value or purchase price, only on the original construction cost or the construction cost as estimated by a qualified quantity surveyor.

Key Factors in the Calculation:

• Construction Start Date: This determines eligibility and the applicable rate. Most residential buildings built after 15 September 1987 qualify for the 2.5% deduction rate.
• Construction Cost: If you didn’t build the property yourself, a qualified quantity surveyor will estimate the original construction cost (not including land, plant and equipment, or design/marketing fees).
• Years Remaining: The deduction is claimable for up to 40 years from the date construction was completed. So, if the property is already 10 years old, you may be eligible to claim for the remaining 30 years.

Example:

If the eligible construction cost is $200,000:

• You can claim $5,000 per year (2.5% of $200,000) for up to 40 years, provided the property is used to produce income and remains eligible.

These deductions can significantly reduce your taxable income, especially when combined with Division 40 (plant and equipment) depreciation.

Division 40 vs. Division 43: Key Differences 

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

How Renovations Affect Claiming Depreciation?

Renovations can significantly impact your property depreciation deductions, particularly under Division 43 (Capital Works).

1. New Construction Costs Become Deductible Capital Works

Any structural renovation, such as adding a new room, upgrading a kitchen, replacing a roof, or extending a garage counts as new construction expenditure. These improvements are treated as capital works and are claimable at a fixed rate of 2.5% per annum over 40 years from the date the renovation is completed.

To calculate your deduction correctly, the ATO requires the use of actual construction costs. If these aren’t available (e.g. the work was completed by a previous owner), an independent qualified person, such as a quantity surveyor, can estimate them based on industry rates and ATO guidelines. These costs exclude non-structural elements such as curtains or furniture, which are instead depreciated under Division 40.

Example:
You add a $20,000 extension to the back of your rental property.
You can now claim $500 per year (2.5% of $20,000) as a capital works deduction over 40 years.

2. Residual Value Write-Offs for Demolished Structures

If you demolish or remove any part of the original structure during a renovation, the undeducted value of that element may be eligible for an immediate write-off. This is referred to as a residual value deduction.

To claim this, you need to know:

• The original construction expenditure allocated to the demolished item
• How many years’ worth of depreciation has already been claimed
• The remaining value, which can be written off in full in the year of demolition

Example:
If you remove an old roof that still has $3,000 of its Division 43 value remaining, you can deduct that entire amount in the same financial year the demolition occurs, as long as you have the correct documentation.

Then, if the new roof cost $20,000, it qualifies as new Division 43 construction expenditure, and you can begin claiming depreciation at 2.5% per year.

Renovations offer a dual opportunity: increase your property’s value and unlock additional depreciation benefits. But to do it right, you’ll need accurate records, clear construction costs, and often the help of a professional quantity surveyor to ensure every eligible deduction is captured.

Second-Hand Plant and Equipment Rules

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

Since 1 July 2017, you generally can’t claim previously used (second-hand) plant and equipment in a residential rental property you bought at or after 7:30pm (AEST) on 9 May 2017, or in a former home you first rented out from 1 July 2017. The main exceptions are property used in carrying on a business, or owned by an excluded entity such as a company or a super fund that isn’t a self-managed super fund.

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 2, 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 deductions 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 the property is used in carrying on a business or owned by an excluded entity such as a company or a super fund that isn’t a self-managed super fund, 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.