Division 40: A Guide to Plant & Equipment Depreciation 

What is division 40?

Tuan Duong

Division 40 (also known as plant & equipment, depreciating assets or capital allowance) is the category for assets that are not attached to a building but can be removed. This includes appliances and furnishings. Each plant or equipment on your property has an effective life measured in years. 

The tax commissioner determines the effective life in Taxation Ruling TR 2023/2. It’s used to calculate the asset’s decline in value. 

Legislative Framework 

Division 40 of the Income Tax Assessment Act 1997 is the legislative framework for depreciating asset deductions as outlined by the Australian Taxation Office in the ATO’s Guide to Depreciating Assets. This section covers: 

  • Uniform capital allowance (UCA) 
  • Definition of depreciating assets 
  • Calculation of decline in value 
  • Specific anti-avoidance provisions 

Common Division 40 Assets 

According to the ATO’s Rental Properties Guide, here are the assets that fall under Division 40: 

Residential Commercial 
Oven Fire hydrant booster 
Rangehood Billi hot water unit 
Air-conditioning units Door closers for door struts 
Smoke alarms Coffee machine 
Electric garage door & remotes Warehouse cranes & hoists 
Downlights  

Depreciation Rates and Methods 

Here are some methods property investors can use to calculate tax deductions: 

Diminishing Value Method 

The diminishing value method is crucial for calculating tax deductions related to asset depreciation. This method is particularly relevant for items over a certain value, as it allows for higher tax deductions in the initial years due to rapid depreciation.  

It is commonly applied to various types of plant and equipment, with the rate of depreciation varying based on the asset’s cost and effective life. 

Low-value Pool 

Per the ATO’s Low-value Pool Guidelines, assets are depreciated as follows: 

  • 18.75% in the first year (for low-cost assets only) 
  • 37.5% in subsequent years (for all assets under $1,000) 

This strategy essentially depreciates the value of your assets at an accelerated rate, making it possible to depreciate the bulk of your assets’ value within 3 to 4 years. 

Effective Life Depreciation 

For any other items that don’t fit into the above categories as low-value pooled or immediately written off, they will be depreciated as per the effective lives assigned in the effective-life schedule in TR 2023/2. 

Eligibility Assessment 

We always ask two questions of an investor: 

  1. When was your building built? 
  1. What type of building do you own or lease? 

Legislative Changes and Current Rules 

According to the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, property investors who sign the contract for a purchase of a second-hand residential after 7:30pm on 9th of May 2017 are not eligible to claim property depreciation on plant and equipment (division 40).  

They are still able to claim tax depreciation on new plant and equipment like carpet and air-conditioning units. Understanding the effective life and categorisation of new assets is crucial for maximising deductions, and a specialist Quantity Surveyor can help ensure that both existing and new assets are accounted for correctly to optimise tax benefits. 

Eligible Scenarios for Property Depreciation Claims 

Based on the ATO’s Taxation Ruling 2017/2, you can claim depreciation in the following eligible scenarios: 

  • Brand new residential properties 
  • Buildings that still qualify for building depreciation (see Division 43) 
  • Second-hand properties that have had major renovations 
  • Second-hand properties that have had minor renovations 
  • Investors in Managed Funds 
  • Corporate entities that buy properties (e.g. Pty Ltd Company) 
  • Second-hand property owners who buy new plant and equipment 
  • PPOR owners who switch to rental properties prior to 1st July 2017 
  • You own a non-residential property (commercial, industrial or motels) 

Common Mistakes to Watch Out For 

According to the ATO’s Compliance Program, there are several common mistakes to watch out for when dealing with asset depreciation.  

These include incorrect asset classification, where issues arise from misidentifying fixed versus removable assets, making wrong effective life assignments, and incorrect pooling decisions.  

Having a proper depreciation schedule prepared by a specialist is crucial to avoid these common mistakes and ensure accurate tax deductions.  

Documentation errors are another significant concern, encompassing insufficient purchase records, missing disposal documentation, and incomplete renovation records.  

Additionally, calculation mistakes frequently occur, such as using incorrect depreciation methods, wrong starting dates, and miscalculated partial-year claims. 

Record Keeping Requirements 

As per ATO Record Keeping Guidelines, several essential records must be maintained for proper asset management.  

These include purchase records and documentation of the written-down value, which is particularly crucial for low-value assets that have depreciated significantly over time, especially those with a value of less than $1,000, as it helps in calculating depreciation for tax deductions.  

Additionally, you should keep detailed records of installation dates, asset disposal records, improvement costs, and usage logs for dual-purpose assets. 

Professional Engagement Guidelines 

The Australian Institute of Quantity Surveyors recommends engaging a qualified quantity surveyor in several key situations, including when buying a property over 40 years old, making major renovations, dealing with complex asset classification, or needing retrospective valuations.  

It’s important to consult a tax professional for matters such as depreciation planning, complex ownership structures, mixed-use properties, and major renovations. 

Case Studies 

Based on the ATO’s Practical Compliance Guidelines:, here are some examples of how property investors can get deductions from Division 40 assets: 

Example 1: New Residential Property 

A new $500,000 apartment has $45,000 in depreciable assets. First year deductions are $5,000-$7,000 depending on purchase date and asset mix. 

Example 2: Commercial Property 

A $2M warehouse with $150,000 in plant and equipment can have $15,000-$20,000 in first year Division 40 deductions. 

When it comes to claiming depreciation on investment properties, there is also division 43 (also known as capital works, building write-off or building allowance). Compare them here

Recent Changes 

The latest tax ruling  provides updated guidance on several key areas of tax depreciation.  

The ruling addresses effective life determinations, where it is crucial to have a structured tax depreciation schedule to properly categorise assets under Division 40 and Division 43, ensuring maximum tax savings from plant and equipment as well as capital works allowances.  

The ruling also covers industry-specific issues, composite items, and software and technology assets. 

Key Takeaways 

  • Division 40 specifically covers plant and equipment depreciation for removable assets in buildings, with effective lives determined by Tax Ruling TR 2023/2. 
  • Since May 2017, second-hand residential property investors cannot claim depreciation on existing plant and equipment, but can still claim on newly purchased items. 
  • Eligibility for depreciation claims extends to brand new properties, qualifying buildings, renovated properties, corporate entities, and non-residential properties. 
  • The diminishing value method offers higher initial tax deductions, with special provisions for low-value pools (18.75% first year, 37.5% subsequent years for assets under $1,000). 
  • Accurate record keeping is essential, including purchase documentation, written-down values, installation dates, disposal records, and usage logs for dual-purpose assets. 
  • Professional guidance is recommended, particularly from quantity surveyors for properties over 40 years old, major renovations, or complex asset classifications. 
  • Common pitfalls include incorrect asset classification, documentation errors, and calculation mistakes – which can be avoided through proper professional assistance. 

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Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.

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Tuan Duong

Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.

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