Division 40 vs Division 43: tax depreciation explained
By TaxShieldPublished Updated 6 min read
Quick answer
Division 40 covers plant and equipment, such as ovens, carpets and air conditioners, claimed over each asset’s effective life. Division 43 covers capital works, the building structure and structural improvements, usually 2.5% a year over 40 years. For residential property bought on or after 9 May 2017, previously used plant and equipment generally cannot be claimed.
- Division 40 covers plant and equipment, claimed over each asset’s effective life; Division 43 covers capital works, usually 2.5% a year over 40 years.
- Prime cost gives the same deduction each year; diminishing value gives larger deductions early on.
- For second-hand residential property bought from 9 May 2017, previously used plant and equipment generally cannot be claimed, but capital works are a separate rule.
- Assets costing $300 or less can generally be deducted outright, and low-cost assets can go into a low-value pool.
- Capital works deductions you claim, or could claim, reduce your cost base when you sell.
On this page
What is Division 40 (plant and equipment)?
Division 40 of the Income Tax Assessment Act 1997 covers depreciating assets: items in a rental property that wear out or become obsolete. The ATO lists examples such as floating timber flooring, carpets, curtains, appliances like a washing machine or fridge, and furniture. In a schedule these are usually the ovens, dishwashers, hot water systems, air conditioners, blinds and ceiling fans.
Effective life and the two methods
Each asset has an effective life, the number of years it is expected to be useful. The ATO publishes effective lives for common assets and updates them from time to time, so any table you rely on should be dated. The yearly deduction is then worked out using one of two methods:
- Prime cost: the same amount each year. Cost × (100% ÷ effective life).
- Diminishing value: a constant portion of the remaining value, so larger deductions in the early years. Cost × (200% ÷ effective life).
An asset costs $1,500 and has an effective life of 5 years. Prime cost gives $300 a year ($1,500 × 20%). Diminishing value gives $600 in the first year ($1,500 × 40%) and $360 in the second ($900 × 40%). The figures are round numbers to show the arithmetic, not a client result.
Low-cost items
The ATO says an asset costing $300 or less can generally be deducted in full in the year you first use it for rental income, unless it is part of a set that together costs more than $300. Assets costing less than $1,000 can be grouped in a low-value pool, which is depreciated at 37.5% a year (18.75% in the year an asset is added). There are conditions, for example assets previously depreciated using the prime cost method cannot go into the pool, so ask your accountant what applies.
What is Division 43 (capital works)?
Division 43 covers the construction cost of the building itself and certain improvements. According to the ATO, you can generally claim the cost of building construction, altering a building, major renovations to a room, extensions such as garages or patios, and structural improvements such as a driveway, fence or retaining wall. Deductions start once the construction of the relevant works is completed.
The rate depends on what was built, when construction commenced and how the building is used. The ATO sets out the detail in its capital works table. In summary:
| Type of construction | Construction commenced | Rate and period |
|---|---|---|
| Residential building (or building used to produce income) | 18 July 1985 to 15 September 1987 | 4% a year (25 years) |
| Residential building (or building used to produce income) | From 16 September 1987 | 2.5% a year (40 years) |
| Non-residential building, such as a shop or office | 20 July 1982 to 21 August 1984 | 2.5% a year |
| Non-residential building, such as a shop or office | 22 August 1984 to 15 September 1987 | 4% a year |
| Non-residential building, such as a shop or office | From 16 September 1987 | 2.5% a year |
| Structural improvements (for example a driveway, fence or retaining wall) | After 26 February 1992 | 2.5% a year |
| Qualifying short-term accommodation for travellers (for example, 10 or more apartments, hotels and motels) | From 27 February 1992 | 4% a year |
| Eligible build-to-rent development (50 or more dwellings and other tests) | After 7:30 pm AEDT on 9 May 2023 | 4% a year |
Some pre-16 September 1987 contracts have their own rules. This is a summary of the ATO’s table, not a substitute for it, so check the exact construction date and use with your accountant.
If the construction cost of a residential building was $300,000 and construction commenced after 15 September 1987, the capital works deduction is $300,000 × 2.5% = $7,500 a year, for up to 40 years. Your own figure depends on the actual or estimated construction cost.
If the construction cost is not known
If it is not possible to determine the actual construction costs, the ATO says you can get an estimate from a quantity surveyor or another independent qualified person. This is the situation for many investors who buy an established property.
Capital works and capital gains tax
Capital works deductions you can claim cannot be included in the cost base of the property, and the ATO says any unclaimed capital works expenses are used when working out your capital gain or loss on sale. Your accountant applies this. See our CGT Cost Base Reports page and our guide to the changes starting on 1 July 2027.
What is the 9 May 2017 second-hand property rule?
From 7:30 pm AEST on 9 May 2017, the ATO says you generally cannot claim a deduction for the decline in value of second-hand depreciating assets used in a residential rental property. A second-hand asset is one that was already installed ready for use, or used, by another entity or in a private residence, for example the previous owner’s oven or carpet in an established home you buy.
You can generally still claim plant and equipment in a residential rental where, for example:
- you bought the rental property before 7:30 pm AEST on 9 May 2017, whether or not it was new;
- the asset is brand new, for example you bought and installed a new dishwasher after settlement, or it came with a brand-new property; or
- other conditions in the ATO’s rules are met, for example some newly built or substantially renovated properties that no one has lived in.
The ATO’s rules have more detail and exceptions than this summary. The limit is about residential rental properties, and capital works deductions under Division 43 are a separate rule that this change does not remove.
An investor buys an established house after 9 May 2017. The previous owner’s six-year-old oven is a second-hand asset, so its decline in value generally cannot be claimed. The investor then installs new carpet: a new asset the investor owns and installs, so its decline in value can generally be claimed over its effective life. If the house’s construction commenced after 15 September 1987, capital works deductions can generally still be claimed on the construction cost. Whether each item qualifies depends on the facts.
This is also why a schedule for an established property can be weighted towards capital works. Our guides on older properties and what you can claim go through typical items.
Division 40 and Division 43 side by side
| Division 40: plant and equipment | Division 43: capital works | |
|---|---|---|
| What it covers | Removable or mechanical assets that wear out | The building structure and structural improvements |
| Typical examples | Ovens, dishwashers, carpets, blinds, hot water systems, air conditioners | Walls, roof, floors, built-in kitchens and bathrooms, driveways, fences |
| How it is worked out | Effective life; prime cost or diminishing value | Construction cost × a set rate (2.5% or 4%) |
| Cost information | Cost of each asset, or an estimate | Actual construction cost, or an estimate from a quantity surveyor or other independent qualified person |
| Affected by the 9 May 2017 rule? | Yes, for second-hand assets in residential rentals | No, that rule does not apply to capital works |
| Effect on CGT cost base | Handled under the depreciating asset rules; ask your accountant | Deductions you can claim cannot be included in the cost base |
What is changing between 2023 and 2027?
- 2023: the 4% capital works rate for eligible build-to-rent developments applies where construction commenced after 7:30 pm AEDT on 9 May 2023.
- 2024–25: the ATO says sole traders have 4 years to amend an assessment for 2024–25 and later income years (2 years for 2023–24 and earlier). This matters when you are looking at earlier years.
- Ongoing: the ATO updates its effective life determinations from time to time, so check the date of any effective life table.
- 1 July 2027: negative gearing for residential property is limited to new builds, and the 50% CGT discount is replaced for individuals, trusts and partnerships. The ATO and Treasury pages we have read describe these as changes to negative gearing and CGT. They do not describe changes to the Division 40 or Division 43 rules themselves. Read our explainer and check the ATO page for the latest position.
Common questions
What is the difference between Division 40 and Division 43?
Division 40 covers plant and equipment, such as ovens, carpets and air conditioners, claimed over each asset's effective life. Division 43 covers capital works: the building structure and structural improvements, claimed at a set rate of the construction cost, usually 2.5% a year over 40 years. A tax depreciation schedule shows each separately.
Can I claim depreciation on a second-hand property bought after 9 May 2017?
Often yes for capital works (Division 43). For previously used plant and equipment in a residential rental property, the ATO says there are limits from 7:30 pm AEST on 9 May 2017, with some exceptions, for example brand-new assets you install yourself. Your accountant confirms what applies to your property.
What is effective life?
Effective life is the number of years a depreciating asset is expected to be useful. The ATO publishes effective lives for many common assets, and the yearly deduction is worked out from the asset's cost and effective life using the prime cost or diminishing value method.
Should I use prime cost or diminishing value?
The ATO describes diminishing value as claiming higher deductions in the early years of an asset's effective life, and prime cost as a lower but more constant amount each year. Which suits you depends on your circumstances, so ask your accountant.
How long do capital works deductions last?
At 2.5% a year the deduction runs for 40 years, and at 4% a year for 25 years, according to the ATO. The rate depends on the type of construction, when construction commenced and how the building is used.
Do capital works deductions affect capital gains tax?
Yes. Capital works deductions you can claim cannot be included in the property's cost base, and the ATO says unclaimed capital works expenses are used when working out your capital gain or loss on sale. Your accountant works out the figures.
Keep reading
What is tax depreciation?
How the deduction works, who can claim it and what a tax depreciation schedule shows.
Read 
What can you claim in a tax depreciation schedule?
The Division 40 and Division 43 items a residential rental can carry, in plain English.
Read
Tax depreciation on older properties
Why an older home can still carry deductions, and the dates and rates that decide it.
Read
Sources (checked 11 November 2026)
General information only, not tax advice. Speak to your accountant or tax adviser about your own circumstances. TaxShield Pty Ltd ABN 79 156 400 510. TaxShield is not endorsed or certified by the ATO.
