Capital Works Deductions (Division 43)

As a property investor in Australia, dealing with tax deductions can be overwhelming. There are two main types of deductions that you, as a property investor, can claim. We know it can be quite difficult to differentiate between Division 40 (deductions on plants and equipment) and Division 43 (capital works deductions). In the following post, we’re going to dig deeper and cover all the main areas of Division 43 Capital Works.

What is Capital Works (Division 43)?

Capital works are all building and engineering works that produce an asset (a property) with all needed fixtures and installations to make it fully functional. Capital works include:

• building construction
• building extensions and alterations
• structural improvements and installations.

What is capital works deduction?

Capital works deduction (Division 43 depreciation) can be defined as income tax deductions a property investor can claim from the wear and tear of the property, its structural components and improvements, and all assets that are considered as permanently fixed to the investment property. In other words, a capital works deduction is an income tax deduction, which can be claimed for construction or structure improvement costs, according to ATO Division 43 legal conditions:

What assets are deductible under Division 43?

The two main types of properties affected by the Division 43 are residential and commercial properties.

Deductible residential property assets

In residential properties, we usually have fixtures and installations such as:

• Driveways
• Built-in kitchen cupboards
• brick and mortar
• walls
• flooring
• electrical wiring
• fences
• doors and locks
• basins
• baths or showers

Sometimes it can be unclear whether an asset can fall under plant and equipment depreciation, or under capital works. The best way to be perfectly clear about where to put a certain asset is to reach out to a quantity surveyor who can help with Division 40 and Division 43.

Deductible commercial property assets

While in commercial properties, we usually have:

• mezzanines
• built-in workstations
• kitchenettes
• flooring
• electrical wiring
• walls
• paint
• warehouses
• baths and toilet bowls
• shelving
• car parks

Who can claim capital works deduction?

All property investors (individual investors, funds, companies and trusts) and owners of income-producing properties can claim capital work deductions. Both residential and commercial property owners are eligible for deductions under Division 43.

How to claim Division 43 deductions?

To claim it, you’ll need to know and document:

• the date construction work started
• the date that construction work was completed
• the total cost of construction and structural improvements
• information about the type of construction
• if the property was used for income-producing purposes.

Note that you need to document the real construction cost and not an estimation. In case that’s not possible, you can get an estimated value from reliable and registered building quantity surveyors.

Capital works deduction rate in Australia

How to calculate capital works deductions? Usually, the deduction rate is dependent on the actual construction costs, and not the estimated cost.  Also, different rates apply depending on the time when construction work started, the type of capital works, and the intended use of the building.

What is capital works deduction for residential and rental properties?

For residential properties built after 15th September 1987, the capital works deduction rate is 2.5% per annum for 40 years. For structural improvements of residential properties made after 27 February 1992, the deduction can be claimed for the construction cost at a yearly rate of 2.5% for 40 years.

When it comes to rental properties, capital works deductions can be also claimed for 40 years, but bear in mind that the deduction cannot exceed the total construction costs. Also, the deduction can be claimed only when the construction work has been completed.

What is capital works deductions for commercial properties?

For commercial properties, the deduction rate which can be claimed is either 2.5% or 4%, depending on the time when construction started, and the type of capital works.

Capital works deduction cost base

it’s important to know the difference between claimable and not claimable costs for the division 43 deduction. Some costs of commercial or residential property that can be claimed are:

• preliminary costs such as architects’ fees, engineering fees, building permits, and all other costs incurred before the construction
• payments to carpenters and other services related to the construction of the building,
• cost of construction for fences, walls, and other amendments considered as structural parts of the building (adding or removing walls, adding a room or a deck).

However, there are also some costs that cannot be claimed for capital works purposes, such as:

• the cost of purchasing the land where the construction will take place
• the costs of clearing the land before the construction
• excavation costs that are not intended for installation or construction purposes

How does capital works affect capital gains tax?

Since the depreciation defined by Division 43 will reduce the cost base of the property, it will increase the capital gain amount, and consequently, the capital gains tax. If you plan to sell a property, capital work deductions will be taken into account. All claimed deductions under Division 43 will be deducted from the cost base of the property, which will affect the capital gains.

Division 40 vs Division 43 – what is the difference?

Knowing the difference between these two will help you maximise the deductions on your residential or commercial assets. While Division 40 is known to regulate plant and equipment deductions, Division 43 regulates deductions of structural improvements and construction work.

However, the division between them can sometimes be vague. Investors can make mistakes by categorising items incorrectly. Things can get quite complex when some assets can be partially claimed for both Division 40 and Division 43. For example, in-ground pools fall under Division 43, while the pumps for the pool fall under Division 40.

How PBAQs can help with Division 43 depreciation?

We have helped numerous clients in the construction niche to make the most of their capital work deduction. With more than 20 years of relevant industry experience, we know all the ins and outs of the industry and are ready to offer expert advice on the matter.

Starting new construction project?Book your consultation today!

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Angelo Antidormi

Managing Director at Property & Building Assessments Pty Ltd

Angelo Antidormi, Managing Director with over thirty years of experience in the building and construction industry, leads the team of experts at Property & Building Assessments Pty Ltd, providing professional construction advice and value-adding solutions to clients in areas of dispute, estimation, cost planning, and project management.

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