Experienced property investors are usually familiar with the tax depreciation deductions they can claim. However, as a first-time property investor, learning about every tax deduction that can be claimed can be quite overwhelming.
One of the largest tax deductions that can be claimed by property investors in Australia is Capital Works Deductions (division 43). With so many types of assets present to claim depreciation deductions, it can confusing to figure out which are capital works assets.
So, this article is here to help you clearly understand what capital works deductions are and how they work.
What is property tax depreciation?
Before moving on to capital works deductions, it is essential that you understand what property tax depreciation is.
Have you noticed the buildings that have been there for a couple of years? Such buildings have general wear and tear in them as a sign of getting older, and so do the assets within the building.
Due to the general wear and tear in the structure and assets of the building, the value decreases and, hence, depreciates. The ATO (Australian Taxation Office) lets property investors who earn income from their property claim depreciation as a tax deduction.
In property investing, two types of depreciation deductions are present, namely:
Plant and equipment depreciation
Division 40, or plant and equipment, refer to fixtures and fittings found in the building. These are easily removable assets. Items like an air conditioning unit and a carpet would fall under this.
Capital works
This is the depreciation deduction we are going to focus on today, so let’s dive into this.
What are Capital Works Deductions?
Capital works deductions, or Division 43 (as per the Australian Taxation Office), are the income tax deductions investors can claim. The deductions are claimable on the wear and tear of the structural component the building has, along with the permanently fixed items to the property.
The expenses incurred due to structural improvements made to the investment property can also be claimed as capital works deductions. Such structural improvements may even be adding an extra room.
Who can claim Capital Works Deductions?
Property investors who have income-producing properties can claim a capital works deduction. In simpler words, tax depreciation deductions are available to both commercial properties and residential investment properties.
How are Capital Works Deductions calculated?
The percentage rate of depreciation of the building depends upon the following;
- When the construction started
- The intended usage of the property ( residential purposes or commercial purposes)
If the residential property was built after 15 September 1987, property investors could claim capital works deductions at the percentage rate of 2.5% per annum over 40 years.
In case investors make structural improvements to their residential properties after 27 February 1992, the percentage rate remains the same. The capital works deduction for the cost of construction can be claimed at 2.5% per annum for the same period (40 years from the date of completion of the construction).
For the properties used for commercial purposes, a capital works deduction can be claimed at 2.5% or 4% per annum. The percentage applied will depend upon the factors like:
- when construction started
- type of capital works
- nature of the usage
For instance, commercial properties (like offices) can be depreciated at the percentage rate of 2.5% per annum, given that the construction began after 15 September 1987. However, if the construction took place between 21 July 1982 and 15 September 1987, the depreciation rate can be either 2.5% or 4%.
Assets that qualify for Capital Works Deductions
Moving on to the assets that qualify for capital works deductions (Division 43) for both commercial and residential properties, here’s a comprehensive list of them.
Residential property
- Bricks and mortar
- Flooring
- Walls
- Electrical Wiring
- Sinks and basins
- Fences
- Doors and door attachments (locks, handles, etc.)
- Baths and showers
- Retaining walls
- Toilet bowls
Commercial property
- Paint
- Flooring
- Car parking space
- Built-in workstations
- Steel-framing of warehouse
- Kitchenette
- Glass partitions
- Shelving
- Downpipe
- Sinks and basins
Capital Works Deductions on Construction Improvements
A property investor can claim these construction costs under a capital works deduction:
- Building extensions (adding a room or a deck, etc.)
- Altering A building (adding or removing an internal wall etc.)
- Structural improvements (adding a carport or retaining walls etc.)
The expenses incurred before the construction started (for instance, architect fees, quantity surveyor fees, engineering fees and building permits) together form part of the construction costs. As a result, it can be claimed as a capital works deduction.
Capital Works Deductions that do not qualify
There are a couple of works completed that may sound like capital work in nature, but they may not be depreciable. The following of these might be those works:
- Demolition or excavation of a tree (with no intended purpose of building over it) on a block of mand
- Excavation costs for software features’ installation, such as plant and turfing, because these are non-perishable items
- The cost of the land and landscaping
Capital Works Deductions – key takeaways
Knowing how to maximise the tax depreciation deductions that can be claimed as a property investor will help you make the most out of the investment property. The ATO defines two categories of depreciating assets a property investor is eligible to claim, Division 43 (capital works deductions) and Division 40 ( plant and equipment depreciation).
Depreciation on the investment property is a significant tax-deductible expense. You would be surprised to know that it is the second largest tax deduction for an investment property after the interest on the loan. Due to this, a lot of people prefer having a tax depreciation schedule.
A tax depreciation schedule is a report detailing the tax depreciation deductions that can be claimed on your investment property.
We understand that the whole concept of claiming deductions can be quite frightening for a lot of people. Because of this reason, Clear Tax is here to help. Reach out to our team of professional accountants in Melbourne today to figure out the deductions you can claim.
Disclaimer: This website is designed for informational and educational purposes. Although we exert diligent efforts to maintain the accuracy and reliability of the content, we must disclaim liability for any errors, omissions, or inaccuracies. The content provided is “as is” and is not accompanied by warranties, whether expressed or implied. It should not serve as the sole basis for financial or legal decisions.
Given the evolving nature of financial regulations and conditions, the accuracy and reliability of information may change over time. Users are urged to exercise due diligence and consult with a qualified financial professional for personalized advice. ‘Clear Tax Accountants’ bears no responsibility for direct or indirect consequences, encompassing financial loss or legal matters stemming from the use or misuse of the information on this website.
Please be aware that the information, by no means, is a substitute for financial advice.
