Depreciation is the rental property deduction that costs you nothing in cash. Interest, rates and insurance all leave your bank account; depreciation is simply the tax system recognising that the building and its fittings wear out. It is also the deduction Perth investors most often under-claim, either because nobody ordered a depreciation schedule or because the rules changed in 2017 and the old advice stuck around.
What is the difference between Division 40 and Division 43?
The tax law splits a rental property into two buckets. Division 43, capital works, covers the structure itself and anything permanently fixed to it — walls, roof, floors, built-in wardrobes, kitchen cabinetry, tiling, driveways and fencing. Division 40, plant and equipment, covers items that are removable or mechanical — ovens, dishwashers, split-system air conditioners, carpets, blinds, light fittings and hot water systems. The two buckets are claimed at very different rates and are subject to different rules, so correctly allocating each item matters.
How much can you claim for capital works?
For residential buildings where construction started after 15 September 1987, the deduction is generally 2.5% of the original construction cost each year for 40 years. A unit built in 2010 for $300,000 gives you $7,500 a year until 2050, regardless of what you paid for it or when you bought it. You inherit the remaining years from previous owners. Renovations done by previous owners also qualify, from the date the renovation was completed, which is why an older Perth property with a modern kitchen and bathroom can still produce meaningful deductions.
What changed for plant and equipment in 2017?
For residential properties acquired after 7.30pm on 9 May 2017, individual investors can no longer claim depreciation on plant and equipment that was already in the property when they bought it. If you buy an established house with a three-year-old dishwasher, that dishwasher gives you no deduction. Items you buy new and install yourself remain fully depreciable, and the restriction does not apply to brand-new properties where nobody has previously used the assets, or to properties held by a company or used in carrying on a business. Investors who bought before the cut-off keep their existing entitlements.
Do you need a quantity surveyor's depreciation schedule?
Unless you built the property yourself and kept the invoices, you probably don't know the original construction cost — and the ATO does not accept a guess. A tax depreciation schedule from a qualified quantity surveyor estimates the construction cost, identifies qualifying renovations, and lists depreciable items with their effective lives. It typically costs a few hundred dollars, the fee is itself deductible, and it covers the full life of the claims. On a newer property, the first-year deductions alone usually exceed the cost several times over.
How are low-cost items treated?
New items costing $300 or less can generally be written off immediately when you're not carrying on a business. Items costing under $1,000, or that have been written down below $1,000, can be placed in a low-value pool and depreciated at 18.75% in the first year and 37.5% thereafter. Pooling speeds up deductions on the smoke alarms, ceiling fans and window furnishings that otherwise take years to claim individually.
Does depreciation increase your capital gains tax later?
Yes. Capital works deductions you have claimed (or were entitled to claim) reduce the property's cost base, which increases the capital gain when you sell. That is not a reason to skip the claim. You receive the deduction today at your marginal tax rate — up to 47% including the Medicare levy — while the extra gain is usually taxed years later after the 50% CGT discount. The timing and rate difference works in your favour almost every time.
Getting depreciation right is one of the simplest ways to improve the after-tax return on an investment property. Our personal tax services include reviewing rental schedules, checking prior-year claims and amending returns where deductions were missed. Contact us before your next return and we'll make sure your property is working as hard as it should.