A tax depreciation schedule can involve two different sets of rules: capital works deductions for qualifying construction expenditure and decline-in-value deductions for eligible depreciating assets. The property history matters because dates, ownership and whether assets were new or second-hand can change the result.
At a glance
- Division 43 generally relates to qualifying building and structural construction expenditure.
- Division 40 applies to eligible depreciating assets with a limited effective life.
- For residential property, restrictions can apply to deductions for certain second-hand depreciating assets acquired after 9 May 2017.
Understand the two main categories
Capital works under Division 43 can include qualifying buildings, extensions, alterations, improvements and structural improvements used to produce assessable income. Depending on construction date and use, the statutory deduction rate is commonly 2.5% over 40 years or 4% over 25 years.
Division 40 deals with eligible depreciating assets that have a limited effective life. The classification and effective life of an item affect how its decline in value is calculated.
Provide the dates that drive eligibility
Useful dates include the acquisition or settlement date, the date the property first became income-producing, original construction date if known, and the completion dates of later renovations, extensions or fitout works.
If the property was previously a home, was vacant, changed use, or was renovated by a previous owner, provide that history rather than assuming every item is treated the same way.
Provide the best available cost and construction records
Helpful documents include contracts, settlement records, building plans, specifications, inclusions lists, renovation invoices, council or permit information, strata or owners-corporation records, previous depreciation schedules and photographs.
The ATO states that capital-works deductions should be based on actual construction costs where they can be genuinely determined. Where actual construction expenditure cannot be determined, an estimate may be obtained from a quantity surveyor or other independent qualified person.
Second-hand residential assets need specific attention
For residential rental properties, deductions for the decline in value of certain second-hand depreciating assets are restricted where the asset was acquired at or after 7:30 pm on 9 May 2017, subject to statutory exceptions. The restriction does not mean an established property automatically has no depreciation deductions.
Qualifying capital works may still have remaining Division 43 deductions, and new eligible depreciating assets installed by the current owner may be treated differently from existing second-hand assets.
Inspection fills gaps, but it does not replace tax advice
An inspection can help identify construction elements, finishes, plant and equipment, apparent renovation periods and asset quantities. Assumptions should be documented where records are incomplete.
The quantity surveyor prepares the construction-cost and depreciation schedule within the agreed scope; the taxpayer and their registered tax adviser remain responsible for applying the schedule to their circumstances and tax return.