Does claiming depreciation increase your capital gain?
Yes — but not in a way that should stop you from claiming depreciation. Here is how it works and why the maths still favours claiming every dollar of depreciation you are entitled to.
How Division 43 affects your cost base
Under section 110-45 of the Income Tax Assessment Act 1997, every dollar of Division 43 capital works deductions you claim reduces your property's cost base dollar-for-dollar. This means that when you sell, your taxable capital gain is higher by the amount of Division 43 you claimed.
Example:
- Purchase price and costs: $600,000
- Division 43 claimed over 10 years: $50,000
- Adjusted cost base: $600,000 − $50,000 = $550,000
- Sale price: $900,000
- Capital gain: $900,000 − $550,000 = $350,000 (vs $300,000 if no depreciation claimed)
The maths still favours claiming depreciation
The $50,000 in Division 43 deductions you claimed over 10 years saved you tax at your marginal rate — say 37% — which means you saved $18,500 in tax over the ownership period.
When you sell, the additional $50,000 capital gain is subject to CGT at a concessional rate. For an individual who has held the property for over 12 months, the 50% CGT discount applies — so only $25,000 of the additional gain is taxable. At 37%, that is $9,250 in extra CGT.
Net benefit of claiming: $18,500 saved − $9,250 extra CGT = $9,250 ahead by claiming.
This comparison holds up for most investors. The tax you save during ownership is taxed at your full marginal rate, while the CGT on sale benefits from the 50% discount.
Division 40 and cost base
Division 40 plant and equipment deductions do not reduce your cost base directly. However, when you sell, the residual value of depreciating assets (called a "termination value") needs to be assessed. This is a separate calculation from the CGT on the land and building.
Unclaimed deductions still reduce cost base
The ATO reduces your cost base by Division 43 deductions you could have claimed — not just those you actually claimed. If you chose not to get a depreciation schedule and did not claim, the ATO can still reduce your cost base when you sell. This makes not claiming a doubly bad outcome: no tax saving, and a higher CGT anyway.
The bottom line
Claiming depreciation reduces your tax now. The cost base reduction increases CGT later — but at a concessional rate. Over any holding period longer than one year, claiming depreciation is almost always the better financial outcome.