Understanding Division 40 and Division 43

Written by

John

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Blog

Are you utilising your tax deductions on investments? Many property investors in Australia miss out on significant tax savings through depreciation. Understanding the two types of depreciation available—Division 40 and Division 43—is crucial for uplifting your tax benefits. By leveraging this knowledge, you can ensure you’re getting the most from your investment properties. Don’t leave money on the table; learn how Division 40 and Division 43 can work for you.

A calculator and coins focusing on a calculation on how to improve your tax cashflow

Understanding property tax depreciation is essential for property investors, as it allows them to claim deductions for the depreciation of their property and items within it over time, in accordance with Australian Tax Office regulations under Division 40 and Division 43.

Division 40 covers items within your property that lose value over time, such as appliances like fridges and dishwashers, as well as fixtures like curtains. Division 43, on the other hand, pertains to deductions you can claim for the building itself, including structural elements like walls, roofs, and built-in cupboards. Additionally, Division 43 includes the ‘Capital Works Rental Property Allowance,’ which specifically targets the structural components of a rental property. Understanding these divisions ensures you enhance your tax benefits and fully leverage your investment.

Additionally, new properties have a special benefit when it comes to depreciation. Owners of new homes can claim for the building costs and the brand-new items inside. This is applicable for Division 40 and Division 43.

Key Points

  • Property investors can claim depreciation as a form of income tax deductions to reduce their taxable income, emphasising that these deductions can come from both the wear and tear of the structural components of a property (Division 43) and any structural improvements, which are crucial for increasing capital works deductions.

  • Division 40 covers depreciating assets like appliances and floor coverings

  • Division 43 relates to the construction costs of the building itself

  • New builds allow investors to claim deductions for both Division 40 and Division 43

  • Understanding the differences between Division 40 and Division 43 is key to maximising tax savings

Key Differences Between Division 40 and Division 43

It’s key for property investors to know the difference between Division 40 and Division 43. Both offer tax deductions but for different kinds of things in the property. For instance, under Division 40, investors can claim plant and equipment deductions, which include deductions for the depreciating value of assets within the property, such as appliances and furniture. We will be going over what each one covers so you can claim the right benefits for your rental property.

Each asset has a lifespan, measured in years, as determined by the ATO. These details are outlined in the document ‘Taxation Ruling TR 2019/5 – Income tax: effective life of depreciating assets.’

Division 40: Plant and Equipment Depreciation

Division 40 is about things you can move or take out of the property. This includes stuff like stoves, carpets, and lights. Here are some things covered under Division 40:

  • Stoves and ovens

  • Air conditioners

  • Carpets and floor coverings

  • Light fittings

  • Curtains and blinds

Each item in this category has a lifetime for deduction purposes, as determined by the Australian Tax Office (ATO). The ATO provides guidelines on the lifespan and deduction rates for these items, helping you calculate your tax breaks under Division 40 accurately. One of the methods to calculate depreciation for Division 40 items is the diminishing value method, which allows you to claim deductions based on the declining value of assets over time. This method can optimise your tax benefits by reflecting the real decrease in the value of your property’s assets.

Division 43: Capital Works Deductions

In contrast, Division 43 looks at the building’s structure. It mostly involves permanent parts of the property like walls or electrical wiring. Here’s what Division 43 covers:

  • Walls and roofing

  • Doors and windows

  • Bathroom fixtures

  • Kitchen cabinets

  • Electrical wiring

Additionally, structural improvements such as renovations and enhancements to the property’s structure can also be included in capital works deductions.

For Division 43, the year your property was built decides the deduction rate. The table below shows these rates based on construction dates:

Construction Period Depreciation Rate 18 July 1985 – 15 September 1987 4% 16 September 1987 onwards 2.5%

You can claim these deductions for up to 40 years after your property’s construction. However, your property must meet certain ATO rules to be eligible.

To maximise your property deductions, it’s essential to understand the specifics of Division 40 and Division 43. Engaging a qualified surveyor to provide a detailed report for your property can significantly enhance your tax savings. Their expertise ensures that all eligible items and structural components are accurately assessed, allowing you to fully leverage the available deductions under these divisions.

Strategies to Maximise Tax Depreciation

As a property investor, you can enhance your tax depreciation benefits, even for older properties. Understanding the depreciation rules for older properties and updating past tax returns can lead to substantial tax savings, improving your investment property’s financial situation.

Accurately determining the actual construction costs can directly impact the capital works deduction claimable each year over a specific period, ensuring you receive the full benefits available.

Claim Depreciation on Older Properties

Most people think you can only claim depreciation on new properties. But that’s not entirely correct. You can claim tax deductions for depreciation on older rental properties. This is especially true for the building structure under Division 43. For properties built after 1987, you can claim capital works deductions for up to 40 years from the construction date. Construction expenditure encompasses various expenses eligible for capital works deductions, including architect fees, engineering fees, surveying fees, and building permits.

But, claiming for older properties bought after 9 May 2017 can be trickier. This is because of changes in laws about plant and equipment assets.

maximize tax depreciation on older properties

Amend Previous Tax Returns

Have you missed claiming depreciation on your property in the past? You might still have an opportunity to rectify this. The ATO allows investors to update their tax returns for up to two years, enabling you to include previously unclaimed depreciation and potentially recover significant tax savings.

Here’s how you can get started:

  1. Talk to an independent qualified person, such as a qualified quantity surveyor. They can make a report on what you could have claimed before by estimating construction costs and assessing depreciation for capital works deductions, ensuring you obtain accurate assessments for maximising tax benefits.

  2. Get a tax professional to help you add these missed deductions to your previous tax returns.

By updating your depreciation claim and fixing old tax returns, you might get back some big tax savings.

Strategy Description Potential Benefits Claim Depreciation on Older Properties Claim tax deductions for depreciation on older rental properties, particularly for the structural component (Division 43) Maximise tax savings and improve cash flow Amend Previous Tax Returns Amend tax returns for up to two years to include previously unclaimed depreciation deductions Recover missed tax savings from the past

Get an Expert’s Opinion

The various rules stipulated in Division 40 and 43 can be daunting and understandably tedious to deal with. However, conforming with them is essential to avoid any sort of trouble with the ATO. Not to mention, the money you’ll potentially save from deductions and depreciations. Tax professionals can help property investors navigate the complexities surrounding these regulations to maximise savings.

Engage a Qualified Quantity Surveyor

Hiring a qualified quantity surveyor is the way to go. They know how to calculate construction costs, including engineering fees, which are part of the construction costs that a qualified quantity surveyor can help to assess for depreciation purposes. They can also evaluate asset depreciation in your property for accurate investor deductions.

A professional can create a detailed depreciation schedule for your property, outlining the depreciation rates for capital works and asset effective life. This schedule allows you to choose the optimal method for calculating deductions, whether it’s the diminishing value method or the prime cost method. With a tailored depreciation schedule, you can maximise your tax benefits and ensure you’re making the most informed decisions for your investment property.

Depreciation Type Description Depreciation Rate Division 43 (Capital Works) Structural elements of the building (e.g., walls, roof, doors) 2.5% or 4% (depending on construction date) Division 40 (Plant and Equipment) Easily removable or mechanical assets (e.g., appliances, carpets) Varies based on asset’s effective life

With a quantity surveyor’s help, your deductions will be precise and meet ATO rules. This ensures you save more taxes while feeling secure about your claims.

Plus, remember the cost to hire a surveyor for the schedule is tax-deductible. Meaning you can claim their fees as a tax deduction, further adding to the benefits of claiming depreciation on your property.

Key Takeaways

Unlock big tax savings on your investment property by knowing the key differences between Division 40 and Division 43 depreciation. You can claim depreciation deductions even on older properties under Division 43. They cover the structure and any renovations.

If you want to make sure you’ll claim all the deductions you can, it’s crucial to work with a qualified quantity surveyor. They will make a depreciation schedule just for your property. This schedule will show all the deductions you can get to help you understand rental property depreciation rates and follow ATO rules.

Use division 40 and division 43 depreciation to make your investment property more profitable. Don’t miss the chance to get these tax benefits. Talk to a qualified quantity surveyor now. They can help you make the most of your investment property. Understanding property depreciation deductions, including the allowance for items that wear and tear quicker (Division 40) and the Capital Works Rental Property Allowance (Division 43) for the structure of the building, is key to maximising tax savings for investment properties.

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