What are Capital Works Deductions?

Understanding tax depreciation lingo can sometimes be confusing but as an investor, it's important that you have a good understanding of the depreciation deductions you can claim to ensure you get the most out of your investment property.

As outlined by the Australian Taxation Office there are two categories that make up depreciation deductions - division 43 capital works deductions and division 40 plant and equipment depreciation.

Capital works deductions are income tax deductions an investor can claim for the wear and tear that occurs to the structure of the property and items considered to be permanently fixed to the property. This includes any structural improvements that may have been made during a renovation within the relevant dates.

In a residential property, capital works deductions cover the following items:

• Bricks, mortar, walls, flooring and wiring
• Built-in kitchen cupboards
• Clothes lines
• Doors and door furniture (handles, locks etc.)
• Driveways
• Fences and retaining walls
• Sinks, basins, baths and toilet bowls.

Some common items in commercial properties that can be claimed as capital works deductions include:

• Bricks, mortar, walls, flooring, roofing and wiring
• Sinks, tiles, basins and toilet bowls
• Mezzanines
• Ducting for air conditioning.

Particular assets can cause confusion because some parts will qualify for plant and equipment depreciation, while other parts qualify for capital works deductions. An example of this is an air conditioning unit, where the unit itself depreciates under division 40 whilst the ducting for the same unit falls under division 43.

As a general rule, any residential buildings where construction commenced after the 15th of September 1987 will entitle their owner to capital works deductions at a rate of 2.5% per year for up to forty years. For residential buildings where construction commenced from 18th of July 1985 to 15th September 1987 the rate is 4%.

For certain buildings used for short term accommodation such as apartment buildings in which you own at least 10 apartments, units, flats, hotels, motels and guest houses with at least 10 bedrooms, the capital works deduction can be claimed where the construction commenced after 21st August 1979. The rate depends on the date of construction (2.5% or 4%).

In a commercial building, capital works deductions generally apply to buildings where construction commenced after the 19th of July 1982. The rate will depend on the date of construction (2.5% or 4%).

If your property was constructed prior to these dates, it's still important to get in touch with a qualified Quantity Surveyor, such as BMT Tax Depreciation, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner.

A BMT Tax Depreciation Schedule will ensure you're maximising the depreciation deductions for your investment property. If you would like to know more about depreciation, contact one of the expert staff at BMT on 1300 728 726.