Property investors in Australia have access to a range of tax concessions that can significantly enhance the profitability of their investments. Key concessions include depreciation allowances under Division 40 and Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997), as well as capital gains tax (CGT) discounts for long-term property holdings.
Under Division 40, investors can claim depreciation on plant and equipment assets, such as appliances and fixtures within a property. However, post-9 May 2017, investors who acquire second-hand residential properties cannot claim depreciation on previously used plant and equipment unless they were grandfathered in. Division 43 allows for deductions on capital works, which pertain to the building structure and any permanent fixtures, typically over a 40-year period.
The most common misconception is that all property-related expenses are immediately deductible. In reality, capital works deductions are spread over many years, and the rules for plant and equipment have changed significantly in recent years.
To see how this plays out, consider a 2010-built 3-bedroom house in Richmond, Melbourne purchased for $800,000. The property includes a kitchen fit-out and air conditioning system installed in 2010, which qualify for depreciation under Division 40. Assuming a total depreciable value of $30,000, the investor could claim approximately $3,000 in depreciation annually (depending on asset effective lives). At a 37% marginal tax rate, this could reduce the investor’s tax bill by $1,110 annually.
In our experience reviewing thousands of properties across Australia, a frequent oversight is failing to claim depreciation on all eligible assets. Many investors are unaware that structural renovations and improvements can significantly enhance their depreciation claims. Additionally, some investors mistakenly believe that depreciation is optional when, in fact, it is a crucial component of maximising investment returns.
The answer can differ depending on your situation. Properties purchased before 9 May 2017 allow for full depreciation claims on plant and equipment. Pre-1987 buildings might not qualify for Division 43 deductions unless substantial renovations have been made. SMSFs investing in property face different tax treatment, and properties held in joint ownership require careful consideration of each owner's tax position.
Given the complexity and potential financial impact of these concessions, professional advice is invaluable. A Chartered Quantity Surveyor can ensure that all eligible deductions are identified, while an accountant can integrate these into your overall tax strategy for optimal benefit.