Key takeaways:
- The “effective life” of an asset determines the period over which it can be depreciated for tax purposes.;
- All Division 40 (plant and equipment assets) have individual effective lives as determined by the ATO;
- Division 43 (capital works) are typically depreciated over 40 years (but this can vary dependent on construction dates and property use);
- A brand new property will have longer effective life remaining in both Division 43 and Division 40 assets;
- Investors can claim tax deductions for the depreciation of buildings and assets during periods when their investment property is income-producing or available for rent, but not when it is their principal place of residence, or for periods before or after ownership;
- Investors can back-claim for previous years.
Depreciation is an important feature of property investment in Australia, allowing investors to claim deductions for the decline in value of their property and its assets over time. Understanding how long you can claim depreciation and the specifics of Division 40 and Division 43 is essential for maximising your tax benefits. This article will provide a comprehensive guide on these topics, including examples and the importance of using a qualified quantity surveyor.
Effective Life:
The “effective life” of an asset determines the period over which it can be depreciated for tax purposes. For example, most buildings have an effective life of 40 years and so are depreciated over 40 years as a standard. Assets within a property can have varying effective lives, and so are depreciated over varying periods, as described further below.
Division 40: Plant and Equipment
Division 40 covers the depreciation of plant and equipment assets within your property. These are items that can be easily removed or replaced, such as appliances and fixtures. The value of the deductions is based upon the acquisition or total installed cost for the asset. The Australian Taxation Office (ATO) prescribes effective lives for these assets, which can vary depending on the type of building and its use.
Claiming Periods for Division 40:
- The effective life of an asset is the period over which it can be depreciated. For example, a dishwasher might have an effective life of 10 years.
- Depreciation deductions of Division 40 assets can be calculated using either the diminishing value method or the prime cost method. The diminishing value method allows for higher deductions in the earlier years of the asset’s life.
Examples of Division 40 Assets:
| Asset | Effective Life (Years) | Depreciation Method |
| Air Conditioning | 10 | Diminishing Value/Prime Cost |
| Carpet | 8 | Diminishing Value/Prime Cost |
| Oven | 12 | Diminishing Value/Prime Cost |
| Blinds | 10 | Diminishing Value/Prime Cost |
See “How to Calculate Depreciation” for further explanation and examples of diminishing value and prime cost formulae.
Division 43: Capital Works
Division 43 pertains to the depreciation of the building structure and permanent fixtures. The value of the deductions is based upon the historical costs for these works. This includes items that are integral to the building, such as walls, roofs, and plumbing. The ATO also prescribes effective lives for these assets, typically over a longer period compared to Division 40 assets.
Claiming Periods for Division 43:
- Capital works deductions can be claimed at a rate of 2.5% per annum over 40 years for buildings commenced construction after 15 September 1987.
- For buildings commenced construction between 18 July 1985 and 15 September 1987, the rate is 4% per annum over 25 years.
- Division 43 depreciation is not eligible to be calculated using the diminishing value method.
Examples of Division 43 Assets:
| Asset | Construction Date Range | Depreciation Rate (%) | Claiming Period (Years) |
| Residential Building | Post 16 Sep 1987 | 2.5 | 40 |
| Commercial Building | 18 Jul 1985 – 15 Sep 1987 | 4.0 | 25 |
| Structural Improvements | Post 26 Feb 1992 | 2.5 | 40 |
Effective Lives and Their Variability
The Australian Taxation Office (ATO) prescribes effective lives for buildings and assets, which define the period over which these items can be depreciated. However, these effective lives can vary significantly depending on the type of building and its use. For example, a commercial property might have different effective lives for its assets compared to a residential property.
For instance, the effective life of an air conditioning unit in a commercial office building might be shorter than that of a similar unit in a residential property due to the higher usage and wear and tear in a commercial setting. Similarly, the effective life of carpet in a high-traffic retail store would be different from that in a private home.
This variability highlights the importance of accurate assessment and reporting. An incorrect estimation of an asset’s effective life can lead to either under-claiming or over-claiming depreciation, which can affect the financial performance of your investment property and potentially lead to issues with the ATO.
To ensure accuracy, it is advisable to engage a qualified quantity surveyor who can assess the specific conditions and usage of your property and its assets. Quantity surveyors have the expertise to determine the appropriate effective lives and values for depreciation purposes, ensuring compliance with ATO regulations and maximising your tax benefits.
Second-Hand Plant and Equipment in Commercial Properties
For second-hand plant and equipment items included in a commercial property, a quantity surveyor will professionally assess the condition and remaining useful life of each asset. This ensures that depreciation claims for second-hand assets reflect their current value and effective life, rather than their original purchase price and lifespan.
By conducting a thorough inspection and evaluation, a quantity surveyor can determine the appropriate depreciation rates for these assets. This ensures that the depreciation claims are both accurate and compliant with ATO regulations, which is vital for avoiding potential issues during tax audits.
For example, if a commercial property includes a second-hand air conditioning unit, the quantity surveyor will assess its current condition, usage patterns, and remaining lifespan. Based on this assessment, they will assign a new effective life and value to the unit, which will then be used to calculate the depreciation deductions.
Claiming Depreciation Only During Income-Producing Periods
Investors can only claim depreciation for buildings and assets during periods when their investment property is income-producing or available for rent. This means that if the property is being used as the investor’s principal place of residence, depreciation cannot be claimed. Additionally, depreciation deductions are not applicable for periods before the property is owned or after it has been sold. Ensuring that depreciation claims are made only during eligible periods is crucial for compliance with ATO regulations and for maximising the tax benefits associated with property investment.
Back-Claiming Depreciation Deductions
Investors have the opportunity to back-claim depreciation deductions for previous years if they have not been claimed. This process, known as amending past tax returns, allows investors to correct any missed depreciation claims and receive the tax benefits they were entitled to. Typically, investors can amend their tax returns for up to two previous financial years, but in some cases, it may be possible to go back further.
Importance of Using a Quantity Surveyor
Engaging a qualified quantity surveyor to prepare a depreciation report for any residential or commercial investment property is crucial. Quantity surveyors are experts in identifying and valuing depreciable assets, ensuring that you maximise your tax deductions. They must be registered tax agents and registered with the Tax Practitioners Board to provide these services.
Why Choose Capital Claims Tax Depreciation?
Capital Claims Tax Depreciation stands out as the best depreciation specialist for several reasons:
- Expertise: With years of experience in the industry, they have a deep understanding of ATO regulations and effective lives for various assets.
- Accuracy: Their reports are meticulously prepared, ensuring that all eligible deductions are claimed.
- Compliance: They are registered tax agents and comply with all requirements set by the Tax Practitioners Board. We are also Members of the AIQS as Certified Quantity Surveyors.
- Customer Service: Capital Claims Tax Depreciation is known for its excellent customer service, providing clear and comprehensive reports that are easy to understand.
In conclusion, understanding how long you can claim depreciation for your investment property involves knowing the specifics of Division 40 and Division 43. Engaging a qualified quantity surveyor, such as those at Capital Claims Tax Depreciation, ensures that you maximise your tax benefits while remaining compliant with ATO regulations. By doing so, you can significantly enhance the financial performance of your investment property. Call us on 1300 922 220 and speak to one of our friendly experts about your investment property or request a quote with an estimate of deductions here.
Related Articles:
How to Calculate Depreciation: Australian Property Investor Guide
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