Proplyx

Property Depreciation: Division 43, Division 40, First-Owner Rule

Depreciation is one of the largest deductions available to Australian residential property investors — and one of the most misunderstood, particularly after the 9 May 2017 reform restricted plant-and-equipment depreciation to first owners. This guide explains what is claimable, how it changes with property type and age, when to commission a quantity-surveyor schedule, and the practical Year-1 numbers you can expect.

The two divisions

Australian property depreciation under ITAA 1997 splits into two separate divisions. Each asset on a property falls into exactly one of them — the divisions are mutually exclusive per s40-45(2).

Division 43 — Capital works

Covers the building itself: walls, roof, floor structure, fixed plumbing and electrical, the building shell. Deduction is 2.5% per year over 40 years for residential buildings begun on or after 16 September 1987 (s43-25). Buildings begun between 18 July 1985 and 15 September 1987 used a 4% / 25-year rate that has now exhausted. Anything older, and the original structure is not claimable under Division 43 at all (though renovation works completed after the relevant date are claimable on a per-improvement basis).

Division 40 — Plant and equipment

Covers removable assets inside the building: carpets, blinds, hot water systems, ovens, dishwashers, air conditioners, light fittings, smoke alarms. Each asset has its own effective life (a few years for soft furnishings, longer for whitegoods) and decline-in-value method. Plant and equipment depreciation is typically the larger Year-1 figure for a new build because so many items are claimed in their first year.

The 9 May 2017 first-owner reform

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (Act No. 126, 2017, assented 30 November 2017) inserted s40-27 into ITAA 1997. From 7:30PM ACT-legal-time on 9 May 2017, subsequent purchasers of residential property can no longer claim Division 40 plant and equipment depreciation. Only first owners — taxpayers who held the asset when it was first used or installed ready for use — retain access.

The practical effect cuts deeper than most investors realise. Two scenarios on the same brand-new $800k apartment:

Same building, same age, same purchase price — roughly half the deduction. The age of the building does not enter into it; the chain of title does.

How Year-1 amounts change with age

For established properties (Div 43 only, post-9-May-2017), the Year-1 deduction declines with the building's age because each year of ownership consumes more of the 40-year capital-works basis. Rough Year-1 figures on an $800k house:

Apartments and townhouses produce smaller Year-1 figures than houses at the same price, because the proportion of total purchase price attributable to capital works (versus land value) is lower. The Proplyx calculator's lookup estimates these from property type, condition, and construction year — see the calculator's Tax position section.

When to commission a quantity-surveyor schedule

A quantity-surveyor (QS) depreciation schedule is a one-off purchase ($500–$800 typically) that gives you a 40-year deduction plan tailored to your specific property. It identifies every claimable asset, applies the correct effective life, and produces year-by-year figures you (or your tax agent) can plug straight into the rental schedule.

The economics work out clearly for new builds: a $700k+ first-owner property with a Year-1 deduction in the $14k–$20k range produces a Year-1 tax saving of $4,500–$6,400 at a 32% effective marginal rate. The schedule pays for itself many times over in the first year alone, and continues delivering accurate figures for the next 40.

For older established properties where Year-1 deductions are $3k–$4k, the schedule is still worth it for accuracy and audit defensibility, but the payoff per dollar of cost is smaller. Reputable QS firms include BMT, Washington Brown, Duo Tax, and MCG Quantity Surveyors.

How depreciation feeds your tax return

Both Division 43 and Division 40 deductions go on the rental schedule of your Australian individual tax return alongside cash deductions (interest, rates, insurance, management fees, etc.). The combined total reduces your taxable income for the year. The actual tax saving depends on your marginal rate — for a $130k income earner in the 30% income-tax bracket plus 2% Medicare levy, every dollar of deduction saves 32 cents of tax.

The timing of when that saving lands in your bank account is governed by whether you have a PAYG Withholding Variation in place. Without one, you receive the benefit as a year-end refund after lodgement. With one in place, the ATO authorises your employer to withhold less tax from each pay cycle, turning the refund into monthly take-home pay. See the PAYG Withholding Variation guide for how to lodge and what to expect.

See your Year-1 depreciation estimate in the calculator's Tax position section — investor mode only.

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Frequently asked questions

What is depreciation on a residential investment property?

A non-cash tax deduction for the wear-and-tear of the building and its plant and equipment. The ATO recognises that an investment property loses value as it ages, and lets the owner claim a portion of that decline against their rental income each year. It is not money out of pocket — it is a paper deduction that reduces taxable income, increasing the year-end refund (or reducing tax withheld each pay cycle if you have lodged a PAYG Withholding Variation).

Why are there two divisions — Division 43 and Division 40?

They cover different parts of the property. Division 43 covers capital works — the building shell itself: walls, roof, floors, fixed plumbing and electrical. Division 40 covers plant and equipment — the removable items inside: carpets, blinds, hot water systems, ovens, dishwashers, air conditioners. The two divisions are mutually exclusive (per s40-45(2) of ITAA 1997); each asset falls into one or the other.

What is the 9 May 2017 reform and why does it matter?

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 inserted s40-27 into ITAA 1997, restricting Division 40 plant and equipment depreciation on second-hand residential property. From 7:30PM ACT-legal-time on 9 May 2017, only the first owner of a newly-built residential property can claim Division 40 on the existing fixtures. Subsequent purchasers — even of a brand-new build sold a few months after settlement — cannot. They can still claim Division 43 capital works on the building shell. The practical effect: a new-build investor first-owner sees roughly twice the Year-1 deduction of an investor buying a 2-year-old apartment second-hand.

I bought a recently-built apartment — am I a "first owner"?

Only if the seller was the developer (or builder) and you are the first person to take title. If the apartment was sold to someone else first — even briefly, even as a display home, even if no one lived there — you are a subsequent purchaser and cannot claim Division 40. Off-the-plan purchases where you take title from settlement are first-owner transactions; private resales of recently-built units are subsequent-purchaser transactions. The age of the building is irrelevant; the chain of title is what matters.

How much can I claim in Year 1?

It depends on property type, condition, and age. As rough Year-1 averages: a new house in the $700k–$1M range produces $14k–$20k of combined Div 43 + Div 40; a new apartment of the same value produces $11k–$15k; an established property (Div 43 only post-2017) produces $4k–$9k for ≤10-year-old buildings, dropping to $3k–$5k for 30+ years. The Proplyx calculator estimates Year-1 from property type, condition, and construction year — but for accurate figures, commission a quantity-surveyor depreciation schedule.

When should I get a quantity-surveyor schedule?

Practically, anytime the cost of the schedule (typically $500–$800) is less than the difference between the QS-calculated deduction and the rough estimate, multiplied by your marginal rate. For a $700k+ new build that almost always pencils — the schedule pays for itself many times over. For an older established property where Year-1 deductions are $3k–$4k, the schedule is still worth it but the payoff is smaller. Reputable QS firms include BMT, Washington Brown, Duo Tax, and MCG Quantity Surveyors.

What if the building was constructed before 1987?

Division 43 capital works is generally not available on the original structure of buildings begun before 18 July 1985 for residential use, and the modern 2.5% / 40-year rate applies only to construction begun on or after 16 September 1987 (the band between July 1985 and September 1987 used a 4% / 25-year rate that has now run out). Practically, any pre-1987 building has $0 claimable on its original structure today. Capital-works improvements (renovations) done after the relevant date are still claimable on a per-improvement basis — and a QS schedule will identify them. The Proplyx calculator returns a flat $500 placeholder for pre-1987 buildings to cover typical renovation works that subsequent owners can still claim.

Does depreciation actually save me cash, or just paper?

It saves real cash — but the timing depends on whether you have a PAYG Withholding Variation. By default the depreciation deduction reduces your taxable income, which reduces the tax you owe at lodgement (typically July or later); you receive a refund cheque. With a PAYG Variation in place, the ATO authorises your employer to withhold less tax each pay cycle in anticipation of that deduction, so the benefit lands as monthly take-home pay instead. The dollar amount is identical — only the timing changes. See the PAYG Withholding Variation guide for how that mechanism works.

How does this connect to the Proplyx calculator?

The calculator has Construction year and Year 1 depreciation inputs in the Property and Tax position sections (visible only in investment mode). Year 1 depreciation auto-fills from a Year-1 estimate based on property type, condition, and construction year — but you can override with the figure from a quantity-surveyor schedule. The "Cash-positive, tax-negative" gearing chip surfaces when depreciation creates a paper loss on a property with positive operating cash flow — the new-build sweet spot.

This guide is general information about Australian residential property depreciation, not personal tax advice. Year-1 estimates depend on the specific property and assets present; commission a quantity-surveyor schedule for accurate figures. Edge cases — properties acquired before 7:30PM 9 May 2017 with unbroken ownership, mixed-use properties, properties held by an SMSF — follow rules not covered here. For personal advice, speak with a registered tax agent or a quantity surveyor.