Capital Works Deduction (Division 43): What Investors Can Claim

The capital works deduction — also known as the Division 43 deduction — allows investment property owners to claim a portion of the construction cost of a building as a tax deduction each year. It is one of the most valuable and least utilised deductions available to property investors.

What is Capital Works?

Capital works refers to the structural elements and permanent fixtures of a building — the parts you cannot remove without damaging the structure. This includes:

• The building shell (walls, roof, foundations)
• Fixed internal walls, floors, and ceilings
• Built-in shelving and kitchen joinery
• Fixed tiling (floor and wall)
• In-ground swimming pools and spas
• Driveways, paths, and fencing
• Fixed wiring and plumbing

This is distinct from plant and equipment (Division 40), which covers removable items like ovens, carpets, and air conditioners.

Deduction Rate and Period

The capital works deduction is calculated at a flat 2.5% per year of the original construction cost, claimable for a 40-year period from the date of construction.

This means if a residential property cost $400,000 to construct, the annual Division 43 deduction is $400,000 × 2.5% = $10,000 per year, for 40 years.

If you purchase an existing property partway through that 40-year period, you can still claim the remaining years of the deduction — you just need to know the original construction cost and date.

Eligibility Requirements

To claim Division 43:

• The property must be an income-producing property (or available for rent)
• The building must have been constructed after 17 July 1985 for residential properties
• For commercial buildings, the start date is 20 July 1982
• You must be the owner (not a tenant) of the property

There is no eligibility issue based on when you purchased the property — only when it was constructed. You can buy a 20-year-old building and still claim 20 more years of capital works deductions.

Estimating the Construction Cost

When you purchase an existing building, you may not know the original construction cost. A quantity surveyor can estimate the original construction cost using building industry records and cost indices — this is a recognised ATO process.

You cannot simply use the purchase price as a proxy for construction cost. The purchase price includes land value, market conditions, and improvements; only the cost of construction is relevant.

Renovations and Extensions

When you renovate an investment property, the cost of the renovation creates a new Division 43 claim, starting from the date construction is completed. For example, if you spend $80,000 renovating the kitchen and bathrooms, you can claim $80,000 × 2.5% = $2,000 per year for 40 years — in addition to any existing claim on the original building.

Keep all invoices from builders and tradies. A quantity surveyor can incorporate these into your depreciation schedule.

What Happens When You Sell?

When you sell the property, the total capital works deductions you have claimed reduce your cost base for Capital Gains Tax (CGT) purposes. This effectively increases the capital gain on which you will pay tax.

For example, if you claimed $50,000 in Division 43 deductions over your ownership period, your cost base is reduced by $50,000, increasing your taxable capital gain by $50,000. The 50% CGT discount (for properties held more than 12 months) still applies to this gain.

This is not a reason to avoid claiming — you still benefit from the time value of money (deductions now are worth more than tax paid later) and the marginal rate differential if your income is lower when you sell.

Getting a Depreciation Schedule

A quantity surveyor prepares a depreciation schedule that documents both Division 43 (capital works) and Division 40 (plant and equipment) deductions. The cost — typically $500–$800 — is itself tax deductible, and the schedule remains valid for the life of your ownership.

Order the schedule as early as possible in your first year of ownership. If you have owned the property for years without a schedule, you can retrospectively amend tax returns (up to two years for individuals) to claim missed deductions.

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