Depreciation is one of the most valuable tax deductions available to Australian property investors — it is a non-cash deduction that reduces taxable income without requiring you to spend additional money in the year you claim it. There are two separate depreciation streams: Division 43 (the building and structural elements) and Division 40 (plant and equipment — removable or mechanical items).
Division 43 — Capital Works Deductions
What It Covers
Division 43 covers the structural elements of the building:
- Walls, floors, roof
- Built-in shelving, kitchen cabinetry (fixed)
- Internal and external doors
- Fences
- Driveways and paths
- Sealed carparks
- Landscaping (capital works type)
- Swimming pool (structural shell)
The Rate and Conditions
The rate is 2.5% per year of the original construction cost, not the purchase price. The depreciation runs for 40 years from the date construction was completed.
To qualify, the building must have been built after 17 July 1985 (for residential rental properties). Older properties may not have any Division 43 deductions — though any capital improvements made after that date qualify.
Example: You purchase a property. The quantity surveyor estimates the original construction cost of eligible building works at $280,000. Annual Division 43 deduction: $280,000 × 2.5% = $7,000 per year
The CGT Adjustment
When you eventually sell the property, the cost base is reduced by the total Division 43 deductions claimed over the ownership period. This increases the eventual capital gain. For example, if you claimed $7,000/year for 10 years ($70,000 total), the cost base is reduced by $70,000, making the capital gain $70,000 larger at sale.
Division 40 — Plant and Equipment Depreciation
What It Covers
Division 40 applies to items that are removable, mechanical, or not structural:
| Item | Effective life | Annual rate (DV) |
|---|---|---|
| Air conditioning unit | 10 years | 20% |
| Hot water system | 12 years | 16.67% |
| Carpet | 8–10 years | 20–25% |
| Dishwasher | 10 years | 20% |
| Oven and cooktop | 12 years | 16.67% |
| Blinds and curtains | 6–8 years | 25–33% |
| Smoke alarms | 5 years | 40% |
| Garage door motor | 10 years | 20% |
The ATO publishes effective lives for hundreds of assets in Tax Ruling TR 2023/1.
2017 Restriction — Second-Hand Properties
A significant change from 1 July 2017:
- Investors who purchased a second-hand residential property after 7 May 2017 cannot claim depreciation on plant and equipment items that came with the property at purchase
- New items you install after purchase (e.g., a new dishwasher you buy and install) are fully depreciable
- New properties (purchased off-the-plan or never previously used as residential accommodation) are not affected — Division 40 is fully available
This restriction significantly reduced depreciation deductions for investors buying existing properties.
Getting a Quantity Surveyor Report
A quantity surveyor (QS) report identifies and values all depreciable assets and construction costs. It provides:
- Division 43 construction cost and annual deduction schedule
- Division 40 plant and equipment values and depreciation schedule
- The report is prepared at your cost (typically $400–$700) and is itself a deductible expense
While not legally required, a QS report maximises the depreciation claim and provides defensible documentation. For properties where significant depreciation is available, the cost of the report is typically recouped in the first year.
How to Claim Depreciation on Your Tax Return
In myTax, rental property depreciation appears in the Rental schedule under:
- Capital works (Div 43) — enter the annual deduction from your QS report
- Decline in value of depreciating assets (Div 40) — enter each item or the total from your depreciation schedule
Frequently Asked Questions
Do I need a QS report if I own an older property? If the property was built before 1985 and has no significant post-1985 capital improvements, there may be no Division 43 available. Division 40 deductions on new items you have installed may still be available, and these can be calculated without a QS report.
I renovated the kitchen. Does that attract Division 43? Yes — capital improvements made after 17 July 1985 are depreciable at 2.5% per year. The renovation cost (labour and materials) that constitutes structural or fixed work is the depreciable amount.
Does depreciation reduce my loan balance? No. Depreciation is a non-cash accounting deduction. It does not affect the loan balance — it reduces your taxable income each year.
I bought an investment property that is also partly my main residence (e.g., a granny flat). Does depreciation still apply? Depreciation applies to the investment portion. Expenses, income, and depreciation must be apportioned between the private and investment uses.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.