The following article is used with permission from BMT Tax Depreciation, Quantity Surveyors

The Great Division: Division 40 vs Division 43

Maximising property depreciation deductions requires a clear understanding of how the different parts of a rental property qualify for Division 40 or Division 43. A property depreciation report needs to be structured so that deductions are maximised and accelerated when needed. This is achieved by creating an effective balance between assets that qualify for Division 40 and Division 43. Here at BMT Tax Depreciation our job is to identify as many items as possible that will depreciate at a faster rate. Creating this balance will magnify a property investor’s deductions, putting more cash into their pockets sooner.

Division 40
Division 40 is the legislation that covers the depreciation of ‘plant and equipment’, i.e. the removable fixtures and fittings within an investment property. Each plant and equipment item has an effective life set by the Australian Taxation Office (ATO) and the depreciation deduction available on that item is calculated using this effective life.Some of the Division 40 items commonly found within a property include: 

Division 43 

Otherwise known as ‘Capital Works Allowance’ or ‘Building Write-Off’, Division 43 covers the deduction available to owners for the structural elements of a building and the items within the property that are deemed irremovable. It includes the foundations, walls, ceiling, roof and also includes fixed assets like tiles, toilets, built-in cupboards, windows and doors. Properties qualify for this allowance depending on their age and type; either 2.5% or 4% of a property’s historical construction cost or estimated cost can be claimed by a relevant professional such as a Quantity Surveyor.

The Great Division
The main difference between Division 40 and Division 43 is that Division 40 items depreciate faster. For example, while the building structure (Division 43) can be claimed at a rate of 2.5% over 40 years, carpet (Division 40) in a residential property depreciates at a rate of 20% over 10 years (using the diminishing value method).

Some items can create confusion when categorising them into a Division 40 or Division 43 deduction. For example, an air conditioning unit will fall under Division 40,

whereas the ducting throughout the house for the same air conditioner falls under

Division 43. A swimming pool falls under the Division 43 allowance, however, the pumps for the pool qualify for Division 40.  

When these assets are not classified properly, money is lost in the first 5 financial years. We often see the obvious assets classified as Division 40 and the more inconspicuous items sometimes missed. This means they get combined with Division 43 and claimed at 2.5% rather than the much higher rate based upon their effective life, which could mean a difference of thousands of dollars in the property investor’s pocket.

Following are some examples of Division 40 and Division 43 items found inside and outside of a normal home.

It is vital that a specialist Quantity Surveyor completes your property Tax Depreciation Report so you can be sure that your claim is maximised within ATO guidelines. Creating the correct balance between Division 40 and Division 43 is a critical aspect of maximising your deductions. If you are unsure, call BMT Tax Depreciation today for a free, no obligation assessment for your current depreciation claim.