Retiree landlords can claim two depreciation streams: Division 43 for the building structure (2.5% a year over 40 years for post-1987 construction) and Division 40 for plant and equipment. A 2017 reform removed Division 40 deductions for previously used items on second-hand property bought after 9 May 2017, but Division 43 remains available. A quantity surveyor report typically captures both streams and pays for itself in year one.
For Australian retirees holding investment properties as part of their retirement portfolio, tax depreciation is one of the most material — and most consistently under-claimed — deductions available. Where rental income is assessable (typically yes for retirees with directly held investment property), depreciation reduces taxable rental income, lowering the marginal tax paid. For a property generating $30,000-$50,000 of gross rent, depreciation deductions can typically be $5,000-$15,000 per year depending on age, structure, and fittings — easily covering the cost of a quantity surveyor's report in the first year.
How does Division 43 capital works depreciation work?
The depreciation framework operates under two divisions of the Income Tax Assessment Act 1997, each addressing a different category of asset. Division 43 provides annual deductions for capital works — the structural elements of the building (walls, floors, roof, fixed structural fittings). The deduction is calculated as a fixed percentage of the construction cost over the building's effective life: typically 2.5% per annum over 40 years for buildings constructed after 15 September 1987. Some specific building types (short-term traveller accommodation built post-1992) qualify for 4% over 25 years. Buildings constructed before 15 September 1987 generally do not qualify for Division 43 deductions on the original construction, though post-construction renovations and additions can qualify based on their own date.
The Division 43 deduction applies to the owner of the property during the year, regardless of who originally constructed it. A retiree purchasing an established post-1987 investment property inherits the remaining Division 43 deductions for the balance of the 40-year period from original construction. The construction cost must be identifiable — typically through a quantity surveyor's report or original construction documentation. Where original cost isn't documented, a quantity surveyor estimates the cost using construction industry rates as at the original construction date.
How does Division 40 plant and equipment depreciation work?
Division 40 provides deductions for the decline in value of depreciating assets — items with limited effective life that are separately identifiable from the building. In residential investment property, common items include carpets, blinds, curtains, ovens, cooktops, dishwashers, hot water systems, air conditioners, light fittings, smoke alarms, garage door motors, and solar panels. Each asset has an effective life (prescribed by the ATO or determined based on actual circumstances), and the deduction is calculated under either the prime cost (straight-line) or diminishing value method — the latter typically producing larger deductions in early years. Specific thresholds support immediate write-off or low-value pooling for assets below certain values, accelerating early-year deductions further.
What did the 2017 second-hand property reform change?
A significant reform in 2017 changed Division 40 for second-hand residential property. The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 restricted Division 40 deductions for residential investment properties acquired after 9 May 2017. For new residential property (newly built, off-the-plan, or first sale): full Division 40 deductions remain available. For second-hand residential property acquired after the reform: Division 40 deductions for previously used plant & equipment are no longer available to the purchaser. The retiree can claim Division 40 only on plant & equipment they personally install or replace after acquisition. Division 43 (capital works) is unaffected by the reform — the structural depreciation stream continues for second-hand property purchasers.
The reform was framed as an integrity measure — addressing the perceived issue of the same plant & equipment being depreciated multiple times by successive owners. The practical impact for retiree landlords is that buying second-hand investment property post-2017 yields no Division 40 deductions for existing items, only for the structural Division 43 stream and items the new owner subsequently installs. For retirees with long-held pre-2017 properties, both streams continue.
What do the practical scenarios look like?
A few practical scenarios illustrate the framework. Scenario 1: Retiree owns long-held investment property (acquired pre-2017). Both Division 40 (plant & equipment) and Division 43 (capital works) deductions continue. Where original quantity surveyor report wasn't obtained, commissioning one now captures both streams — Division 43 for the remaining building life, and Division 40 for items still owned. Scenario 2: Retiree purchasing established investment property post-2017. Only Division 43 (capital works) deductions available for inherited structural elements. Division 40 limited to items the retiree installs post-acquisition. Quantity surveyor report still valuable for Division 43 calculation. Scenario 3: Retiree acquiring new (off-the-plan or new build) investment property. Both streams fully available; QS report important for both. Scenario 4: Retiree carrying out renovations on existing investment property. Renovation costs split between Division 40 (plant & equipment installed) and Division 43 (capital works for structural elements). QS report supports the apportionment. Scenario 5: Retiree converting their former principal residence to a rental. Depreciation can apply prospectively from the date of conversion, with the second-hand reform's restrictions applying based on the original acquisition date.
What does a quantity surveyor report involve?
For most retiree landlords, the quantity surveyor's report (depreciation schedule) is the practical instrument for capturing the available deductions. A QS report inspects the property (or works from documentation), identifies depreciable assets and capital works, calculates the depreciation schedule for the property's remaining tax life, and provides annual deduction amounts for tax return preparation. Reports typically cost $500-$800, deductible as a tax-related expense, and are generally prepared once for the property's life (with updates for renovations or material changes). The cost is typically recovered many times over in the first year of deductions for properties that have been held without one.
How much is depreciation actually worth?
The value of depreciation deductions for retirees depends on the rental income's tax treatment. Where rental income is fully assessable at marginal rates (the typical retiree with directly held property), each $1 of depreciation saves $0.16-$0.37 of tax depending on the rate. Where the retiree's marginal rate is reduced by SAPTO, low-income tax offset, or pre-pension/below-tax-free-threshold position, depreciation has less marginal benefit but is still claimed. For SMSF-owned property in accumulation phase, deductions reduce the fund's taxable income at the 15% rate; in pension phase, the income is exempt and depreciation has limited value for the pension-phase share.
A consideration on eventual sale: depreciation claimed reduces the property's CGT cost base, increasing the eventual capital gain. The net benefit depends on the marginal tax rate at deduction time vs the eventual CGT outcome, and the 50% CGT discount for individuals on assets held over 12 months typically tilts the calculation in favour of claiming depreciation — the deduction at full marginal rate, the gain at half-rate effectively. For most retirees, claiming depreciation is net-beneficial.
What common pitfalls should retirees avoid?
A few common pitfalls to avoid. Not commissioning a quantity surveyor report — without it, deductions are typically under-claimed. Assuming pre-1987 buildings have no depreciation — even pre-1987 buildings may have post-construction Division 40 plant & equipment and renovations that qualify. Missing the second-hand reform's impact for post-2017 acquisitions — leading to overclaiming. Forgetting the cost base reduction for CGT. Not updating the QS report for renovations.
For Australian retiree landlords, tax depreciation is the single largest under-claimed deduction available on rental property. The QS report is the practical tool. The 2017 reform narrowed claims for second-hand acquisitions but Division 43 remains broadly available. Worth doing deliberately rather than missing — and worth coordinating with the tax agent who actually prepares the claim.
Sources
- ATO — Work out your capital works deductions (Division 43)
- ATO — Second-hand depreciating assets (9 May 2017 reform)
- ATO — Depreciating assets in rental properties (Division 40)
- ATO — Prime cost and diminishing value methods
- ATO — CGT discount (50% for individuals)
- ATO — Cost base adjustments for capital works
Key takeaways
- Division 43 covers structural capital works — typically 2.5% of construction cost per year over 40 years for buildings built after 15 September 1987.
- Division 40 covers depreciating plant and equipment such as carpets, ovens, hot water systems, and air conditioners, each with its own effective life.
- A 2017 reform removed Division 40 deductions for previously used plant and equipment on second-hand residential property acquired after 9 May 2017 — Division 43 was unaffected.
- A quantity surveyor's depreciation schedule (typically $500-$800, a one-off cost) is the practical tool for capturing both deduction streams and usually pays for itself in the first year.
- Depreciation claimed reduces the property's CGT cost base at eventual sale, but claiming is still net-beneficial for most retirees given the 50% CGT discount on assets held over 12 months.
Frequently asked questions
What is the difference between Division 40 and Division 43 depreciation?
Division 43 covers capital works — the structural building itself (walls, roof, fixed fittings) — deducted at a fixed percentage over the building's effective life. Division 40 covers separately identifiable depreciating assets like carpets, appliances, and hot water systems, each depreciated over its own effective life.
Can a retiree buying a second-hand investment property still claim depreciation?
Yes for Division 43 capital works, which are unaffected by the 2017 reform. But Division 40 deductions for plant and equipment that came with the property (rather than being installed by the new owner) are no longer available if the property was acquired after 9 May 2017.
How much does a quantity surveyor's depreciation report cost?
Reports typically cost $500-$800, are deductible as a tax-related expense, and are generally only needed once for the property's life (with updates after renovations). The cost is usually recovered many times over in the first year of deductions for a property that hasn't previously had a report done.
Does claiming depreciation increase the CGT bill when the property is eventually sold?
Yes — depreciation claimed reduces the property's CGT cost base, increasing the eventual capital gain. For most retirees this is still net-beneficial, since the deduction is claimed at the full marginal tax rate while the resulting gain benefits from the 50% CGT discount on assets held over 12 months.