If you own an investment property and you are not claiming depreciation, you are probably leaving thousands of dollars on the table every year. An ATO depreciation schedule for a rental property is the document that unlocks those deductions, and understanding how it works is the difference between a mediocre tax return and one that materially improves your cash flow.
This article covers the two divisions of depreciation that apply to rental properties, how each one is calculated, what the 2017 budget changes mean for second-hand property buyers, and when it makes sense to commission a quantity surveyor report. For a broader overview of every deduction available to property investors, see our guide to investment property tax deductions.
What Is a Depreciation Schedule?
A depreciation schedule is a detailed report that lists every item in your rental property eligible for a tax deduction due to its decline in value over time. It is prepared by a qualified quantity surveyor and covers two categories of deductions: plant and equipment (Division 40) and capital works (Division 43).
According to the ATO, a quantity surveyor can prepare a report at the time a rental property is purchased. The report typically projects eligible deductions for up to 40 years from the property's construction date, and the cost of the report itself is tax deductible in the year you pay for it.
Your accountant uses the schedule to include depreciation deductions in your tax return. Without one, you are relying on guesswork or missing deductions entirely.
Division 40: Plant and Equipment
Division 40 covers depreciating assets that can be described as plant and that do not form part of the rental property's premises. According to the ATO, “premises” refers to the actual structure of the rental property's building. The assets covered by Division 40 are generally items that are separately identifiable, unlikely to be permanent, replaced within a relatively short period, and not part of the structure of the building.
Common Division 40 items include:
- Carpets and floating timber flooring
- Curtains and blinds
- Appliances (dishwasher, washing machine, fridge)
- Furniture
- Air conditioners (split systems)
- Hot water systems
- Smoke alarms
Each asset has an effective life determined by the ATO. You can choose to use either the Commissioner's determination or your own reasonable estimate, but you must keep records to show how you calculated the decline in value.
How Division 40 Deductions Are Calculated
You can calculate the decline in value of Division 40 assets using one of two methods, according to the ATO:
Prime cost (straight line) method: This assumes the asset decreases in value uniformly over its effective life. The formula is:
Asset's cost × (days held / 365) × (100% / asset's effective life)
Diminishing value method: This assumes the asset decreases in value more in the early years of its effective life. The formula is:
Base value × (days held / 365) × (200% / asset's effective life)
The diminishing value method front-loads your deductions, giving you larger claims in the first few years. The prime cost method spreads the deduction evenly. Your accountant can advise which method works better for your situation, and a depreciation schedule will typically show calculations under both methods.
The $300 Immediate Deduction Rule
According to the ATO, assets costing $300 or less can be claimed as an immediate deduction in the income year you use the asset for a taxable purpose. However, you cannot claim the immediate deduction if the asset is part of a set that together costs more than $300. For example, if you buy four dining chairs each costing $250 for your rental property, you cannot treat them as separate assets.
Division 43: Capital Works
Division 43 covers the building structure itself and structural improvements. According to the ATO, capital works includes expenses for building the property as well as structural improvements, alterations, and extensions. The rate of deduction is generally 2.5% per year, spread over a period of 40 years.
To claim Division 43 deductions, the property must have been built after 17 July 1985 and must be rented or available for rent on commercial terms.
Examples of capital works expenses include:
- Building and construction costs
- Alterations to a building
- Major renovations to a room
- Adding a fence
- Building extensions such as garages and patios
- Structural improvements such as a driveway or retaining wall
Preliminary expenses such as architect fees, engineering fees, surveying fees, foundation excavation expenses, and costs of building permits also form part of construction expenses, according to the ATO.
How Division 43 Differs From Division 40
The most important difference: Division 43 deductions are not affected by when you purchased the property (provided it was built after 17 July 1985). Whether you buy brand new or second-hand, you can claim 2.5% of the original construction cost every year until the 40-year period runs out.
This makes Division 43 the more valuable category for investors buying established properties. If you purchase a property built in 2000 with original construction costs of $200,000, you can still claim $5,000 per year (2.5% of $200,000) for the remaining years of the 40-year period.
If the actual construction costs cannot be determined, you can get an estimate from a quantity surveyor or other independent qualified person, and you can claim a deduction for the full cost of that estimate in the year it is incurred, according to the ATO.
The 2017 Budget Changes: What They Mean for Second-Hand Property
This is where depreciation gets complicated for investors, and where many people misunderstand the rules.
On 9 May 2017, the federal government announced changes to how individual investors can claim depreciation on second-hand depreciating assets in residential rental properties. According to the ATO, you cannot claim a deduction for the decline in value of second-hand depreciating assets that were already installed ready for use or used by another entity, in your private residence, or for a non-taxable purpose.
In practical terms, if you bought an established property after 9 May 2017, you cannot claim Division 40 deductions on the existing carpets, appliances, blinds, or other plant and equipment that came with it.
What You Can Still Claim on a Second-Hand Property
Division 43 (capital works) deductions are not affected by the 2017 changes. This is the most commonly misunderstood aspect of the legislation. Even if you buy an established property today, you can still claim the building's construction costs at 2.5% per year under Division 43, provided it was built after 17 July 1985.
You can also claim Division 40 deductions on any new depreciating assets you purchase and install yourself after settlement. So if you buy a second-hand property and install a new dishwasher, new carpet, or new blinds, those items are fully depreciable under Division 40.
Exceptions to the 2017 Rules
According to the ATO, you can still claim second-hand depreciating assets if any of the following apply:
- You are carrying on a business of letting rental properties
- You purchased your residential rental property or a second-hand depreciating asset before 7:30 pm (AEST) on 9 May 2017
- Your rental property is not used to provide residential accommodation (for example, it is let for commercial purposes)
- The entity that owns the property is a corporate tax entity, a superannuation plan that is not a self-managed super fund, a public unit trust, or a managed investment trust
Most individual investors holding one or two properties will not qualify for these exceptions. If you hold property through a company or a non-SMSF super fund, speak to your accountant about whether you can still access Division 40 claims on second-hand assets.
Converting Your Home to a Rental
If you turn your home into a residential rental property on or after 1 July 2017, the ATO states that you cannot claim a deduction for the decline in value of depreciating assets that were already in your home. You can only claim the decline in value for new depreciating assets you purchase for your rental property after the conversion.
When to Order a Quantity Surveyor Report
A depreciation schedule is worth ordering in almost every scenario where you hold an investment property. Here is how to think about it.
New or near-new properties (built within the last 10 years): These properties have the highest depreciation potential because both Division 40 and Division 43 deductions are at their peak. The first-year deductions alone will typically outweigh the cost of the report many times over.
Established properties (built after 1985 but more than 10 years old): Even though the 2017 changes eliminate Division 40 claims on existing assets, Division 43 deductions on the building structure remain available. A quantity surveyor can estimate the original construction costs and calculate the remaining claim period. If the property had renovations by a previous owner, those renovation costs may also qualify as capital works deductions.
Properties built before 1985: Division 43 deductions are not available for properties where construction began on or before 17 July 1985. However, if the property has had structural renovations or extensions after that date, those renovation costs can be claimed. A quantity surveyor can assess whether a schedule is worthwhile.
Properties you are about to renovate: Get the report before you start renovation work. The quantity surveyor can document existing assets that will be removed or destroyed, which may allow you to claim a scrapping deduction (writing off the remaining depreciable value of the demolished items). After the renovation, you can claim depreciation on all the new items installed.
What a Quantity Surveyor Needs From You
To prepare a depreciation schedule, the quantity surveyor typically needs:
- The settlement date (when you became the owner)
- The contract of sale or purchase price
- Access to the property for an inspection (or, for some firms, photos and floor plans for remote assessments)
- Any records of renovation work, including dates and costs
The cost of the quantity surveyor's fee is fully tax deductible in the year you incur it.
How Depreciation Interacts With Capital Gains Tax
Claiming depreciation reduces the cost base of your property for capital gains tax (CGT) purposes. This means that when you eventually sell, the ATO expects you to account for the depreciation you have claimed.
For Division 43 deductions, the construction costs you have claimed reduce your cost base, which increases your capital gain on sale. For Division 40 assets, the decline in value you have claimed reduces the cost base of those individual assets.
This does not mean you should avoid claiming depreciation. The tax benefit you receive each year through reduced taxable income almost always outweighs the additional CGT payable on sale, especially for investors who hold for the long term and qualify for the 50% CGT discount. But it is worth understanding this interaction so you are not surprised at sale time.
For property investors using negative gearing as part of their strategy, depreciation deductions can meaningfully increase the annual tax benefit, improving holding costs while you build equity through capital growth.
Common Mistakes With Depreciation Claims
Claiming second-hand assets you are not entitled to. The ATO flags this as one of the most common errors in rental property returns. If you purchased after 9 May 2017 and you are an individual investor, do not claim Division 40 deductions on items that came with the property.
Not getting a schedule at all. Many investors assume their accountant handles depreciation. Your accountant can process the deductions, but they cannot prepare the schedule. Only a qualified quantity surveyor (or in some cases, a registered valuer) can estimate construction costs and assess asset values for depreciation purposes.
Confusing repairs with capital improvements. According to the ATO, an improvement is anything that makes part of the property better, more valuable, more desirable, or changes the character of the item being worked on. Replacing a damaged fibro wall with a brick feature wall is an improvement (capital works), not a repair. Getting this wrong changes how you claim the expense.
Missing the construction date threshold. Division 43 deductions only apply to properties where construction began after 17 July 1985. If your building predates this, you can still claim on any structural renovations or extensions completed after that date, but not on the original structure.
Next Steps
If you do not have a depreciation schedule for your investment property, getting one ordered should be near the top of your list. For most properties, the first-year deductions will be several times the cost of the report, making it one of the highest-return actions you can take as an investor.
If you are unsure whether depreciation fits into your broader investment strategy, or you want to understand how it interacts with your specific tax position, book a coaching session to work through the numbers with someone who can model it for your portfolio.