Division 43 Allowances – Step by Step Guide to Maximising Your Deductions
In Australia, we are known as the Lucky Country – and when it comes to property taxes, we sure got lucky with Division 43 capital works.
As property investors, we can claim the wear and of the property against our taxable income.
There are two main types of deductions in terms of depreciation when it comes to property:
1 . The Plant and Equipment (Also known as Division 40), this allowance relates to the items in your investment property that wear and tear quicker, like ovens, dishwashers and carpets.
2. The Capital Works Rental Property Allowance (Also known as Division 43) this allowance relates to the structure of the building and refers to items like concrete, brickwork and tiling.
We all know that even the word ‘taxes’ can lead people to hyperventilate. Keep reading for a simple guide on how you can use Division 43 to save some money on your home renovations!
What is Section 43 or Division 43 Capital Works Deductions?
Section 43 references the relevant section of the tax legislation, Income Tax Assessment Act, 1937. The Australian Taxation Office refers to it as the “Capital Works Deduction” or “Building Write-Off”.
This section allows you to claim a deduction against your income for the wear and tear of these structural items if you are a property investor.
In the property tax depreciation schedule world, deductions are exactly what you are aiming for because they are expenses that reduce your taxable income, which means fewer taxes and more money in your pocket.
How Much Can I Claim?
Depending on the type of expense, the date of construction, and the cost of the building or construction cost, you can claim a Division 43 depreciation at a rate of 2.5% to 4%. Generally, for building work after 15 September 1987, you claim a capital works deduction at a rate of 2.5% over 40 years.
Keep in mind that the land itself can’t be written off. The cost of acquiring the land or demolishing existing structures isn’t deductible.
The amount you can claim also depends on the cost of construction. If you don’t remember construction costs or have lost your paperwork, you need to get an estimate from a quantity surveyor.
A Capital Works Depreciation Calculator can help you understand how much you can depreciate or write off in any year.
Does Capital Works Allowance Division 43 Apply to Any Building Work?
Division 43 applies to buildings and structural improvements, only on income-producing properties and only when producing income.
For example, if you rent your property for six months out of the year, you will only be able to deduct 50% of the cost of the capital works or Division 43 depreciation. The calculation is based on the number of days your property was rented out.
The capital works deduction is available for
- buildings, alterations, or improvements to a building, such as a kitchen or bathroom upgrades
- alterations or modifications to a leased building,
- building extensions such as garages, entertainment decks, showrooms, and offices
- structural enhancements such as sealed driveways, fences, and retaining walls
- earthworks for environmental protection, such as embankments
- Initial expenses, including architect or engineering fees, surveying fees, and costs of building permits, also form part of the construction expenditure.
Remember, you can only start to claim this deduction once the renovation is complete.
Difference between Division 43 and Division 40 Allowances
Division 40 is very similar to Division 43, hence all the confusion. You need to know that Division 40 depreciates faster and applies to particular items.
Division 40 is also known as “Plant and Equipment”. Some examples of items Divison 40 applies to include:
- ceiling fans
- air conditioning units
- smoke alarms
- solar panels
- indoor or outdoor furniture
- bathroom exhaust fans
- Division 40 applies at a rate of 20% over ten years.
Determining Division 40 or 43 can be confusing, especially for particular assets. One of many examples is if you are constructing a pool in your rented residential property. Construction of the pool itself would fall under Division 43, but the pumps for the pool would be under Division 40.
If these assets are not classified correctly, you can lose a lot of money over time. Getting expert help to assist with the classification can help you determine the right amount of depreciation without losing any money in the process.
What Are The Capital Gains Impact of Claiming Division 43 Capital Works?
There are some capital gains impact on your property if you claim a Division 43 deduction and sell your rental property in the future. Any deduction that you claim will be reduced from your cost base. This means that you could end up paying more capital gains in the future.
We know that this may not sound great to you. But, it’s important to remember two things.
First, capital gains are taxed at a preferential rate (50% exemption). Second, the time value of money means that a dollar of extra cash now is worth more than potential tax savings in the future.
This also allows you, the investor, to invest the extra money or reduce loan liabilities. Those are extra savings you could be using today.
How Can I Claim My Capital Works Division 43 or Building Allowance Now?
To claim a capital works deduction or building allowance under section 43, you must ensure you have the correct information when starting your renovations; keeping this information on file will make this a more straightforward process. Below is the information you need to know:
- details about the type of construction and type of capital works
- when was the construction commenced, and the date of completion
- cost of construction (remember, this is not the purchase price)
- details of who carried out the construction work
- details of the period during the financial year that the property was rented out (or used for income-producing purposes)
- If you don’t have the construction cost details, you can get an estimate from an expert quantity surveyor or other independent qualified person. You can claim a deduction for this cost in the year you pay it.
Your Next Steps
Keep in mind that if you are the owner and the builder, the value of your contribution does not form part of the construction cost. This includes your labour, expertise, and any profit margin you calculated.
Ensure you have the correct classification and the right rate as you move forward to claim the Division 43 deduction you are entitled to. This is a common mistake made by property investors even though they are entitled to claim it.
Not getting the correct information upfront can result in losses as time passes. To ensure that you don’t miss out on any savings from depreciation and get the maximum depreciation possible, get a quote today!
Get a Division 43 Depreciation Schedule Quote today and start saving now.
About Tyron Hyde
Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.
Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.