What is the difference between Division 43 and Division 40 depreciation for rental properties?

Division 43 covers the capital works deduction, also known as the building allowance. This applies to the structural elements of a building: walls, floors, fixed plumbing, wiring, and so on. For residential properties, construction must have started after 17 July 1985. The deduction rate is 2.5% per year over 40 years. So a building that cost $400,000 to construct generates a $10,000 annual Division 43 deduction.

Division 40 covers plant and equipment items: assets that are removable or mechanical, such as carpets, dishwashers, hot water systems, air conditioning units, blinds, and ceiling fans. Each item depreciates at its own effective life rate set by the ATO. Some items depreciate quickly (carpets over 8 years), while others depreciate more slowly.

A key rule change from 1 July 2017 affects Division 40: residential investors who purchased a property after 7:30pm on 9 May 2017 can only claim Division 40 depreciation on assets they purchased new. They cannot claim depreciation on second-hand plant and equipment already in the property at settlement. Division 43 (building allowance) is unaffected and remains claimable by all investors regardless of when they bought. A quantity surveyor can prepare a tax depreciation schedule to identify all deductible items.