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.
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:
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:
The two main types of properties affected by the Division 43 are residential and commercial properties.
In residential properties, we usually have fixtures and installations such as:
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.
While in commercial properties, we usually have:
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.
To claim it, you’ll need to know and document:
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.
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.
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.
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.
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:
However, there are also some costs that cannot be claimed for capital works purposes, such as:
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.
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.
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.