Understanding Australian Property Depreciation Reports

A property depreciation report (also called a depreciation schedule or tax depreciation schedule) is a document prepared by a quantity surveyor that identifies all depreciable assets in an investment property and calculates the annual tax deductions available to the owner. It is one of the most commonly overlooked deductions for Australian property investors.

• Who prepares it: a Registered Quantity Surveyor (RQS) - one of the few professions the ATO specifically recognises as qualified to estimate construction costs for depreciation purposes (ATO Tax Ruling TR 97/25)
• What it covers: the report documents two categories of deduction - Division 43 (capital works / building allowance) and Division 40 (plant and equipment / fixtures and fittings). Each item is listed with its effective life, cost, and annual deduction
• How long it lasts: a well-prepared depreciation schedule remains useful for the life of the investment. It does not need to be updated annually unless significant capital improvements are made. However, changes in ATO rules (particularly the 2017 plant and equipment restrictions) may affect the ongoing usefulness of older schedules
• Cost of a depreciation report: typically $300-$800 for a residential property, $800-$2,000 for commercial property - depending on property type, size, and location. The fee is fully tax-deductible as a borrowing expense (if obtained at acquisition) or as a property management expense
• When to get one: at or shortly after purchase for any investment property - ideally before the end of the first financial year you hold the property as an investment. Retrospective claims can be made, but ensure the report is obtained before lodging the relevant year's tax return
• Mandatory for maximising deductions: tax agents cannot fabricate depreciation figures - the ATO requires substantiation. Without a depreciation report, many investors claim only mortgage interest and rates, missing thousands in legitimate non-cash deductions annually

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Division 43 of the ITAA 1997 allows investors to claim a deduction for the cost of constructing the building structure itself. This is a powerful, long-duration deduction - but its availability depends on when construction was completed.

• Rate: 2.5% per year of the original construction cost - deducted over 40 years from the date construction was completed (not the date you purchased the property)
• Example: a residential building constructed in 2010 at a cost of $400,000. Annual Division 43 deduction: $400,000 × 2.5% = $10,000/year. A purchaser in 2024 can still claim $10,000/year for the remaining 26 years of the 40-year depreciation period
• What qualifies: the structural components of the building - concrete slab and footings, walls, roof, internal walls and partitions, windows, doors, stairways, and other structural elements permanently affixed to the property
• What does NOT qualify: plant and equipment items (covered by Division 40), landscaping, earthworks, and some non-structural components. The quantity surveyor allocates costs between Division 43 and Division 40
• Construction date threshold: the 2.5% rate applies to residential buildings constructed after 17 July 1985 and commercial buildings constructed after 19 July 1982. Buildings constructed before these dates do not qualify for Division 43
• Renovation expenditure: capital improvements made by any previous or current owner after the relevant commencement date qualify for Division 43 - even if the original construction pre-dates the threshold. A kitchen renovation in 2015 on a 1970s property generates Division 43 from 2015 at 2.5% on the renovation cost

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Division 40 covers the depreciation of plant and equipment (fixtures and fittings) in an investment property. Each item has an ATO-determined 'effective life' - the period over which it is depreciated at either the diminishing value or prime cost rate.

• Common Division 40 items: carpets and floor coverings, blinds and curtains, dishwashers, ovens and cooktops, rangehoods, hot water systems, air conditioning units, ceiling fans, light fittings (removable), solar panels and hot water systems, smoke alarms, garage door openers
• Diminishing value (DV) rate: 200% divided by effective life in years, applied to the asset's written-down value each year. Carpet: 8-year effective life → DV rate 25%. A $3,000 carpet depreciates $750 in year 1, $563 in year 2, etc.
• Prime cost (PC) rate: 100% divided by effective life, applied to original cost each year. Carpet at PC: $3,000 ÷ 8 years = $375/year - straight-line depreciation
• Effective lives of common items: carpet 8 years, blinds 10 years, hot water system 12 years, air conditioning (split system) 10 years, dishwasher 10 years, oven/stove 12 years, ceiling fan 10 years, smoke alarm 8 years
• Pooling rules: low-value assets (under $1,000) can be pooled and depreciated at 37.5% DV in year 1 (18.75% in the first year under the half-year rule) - faster depreciation of minor items
• Immediate write-off: items costing $300 or less (individually) can be immediately deducted in full in the year of acquisition - carpets, curtains, and smoke alarms under $300 are often immediately deductible

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The 2017 Federal Budget introduced a significant restriction on Division 40 claims for residential investment properties. This is the most commonly misunderstood depreciation rule and has major implications for buyers of established properties.

• The restriction: from 7 May 2017, a purchaser of a second-hand residential property cannot claim Division 40 depreciation on existing plant and equipment items that were installed in the property before they became the owner
• What this means: if you buy an established house with existing carpets, dishwasher, and air conditioning, you CANNOT depreciate those items under Division 40. The restriction applies to the items, not the taxpayer - it is activated by the purchase of a property that already contains these items
• What still qualifies under Division 40: any plant and equipment items you install yourself after purchasing the property (new carpets you lay, a new dishwasher you buy, a new air conditioning system you install) - your own new items are still fully depreciable
• Division 43 unaffected: the 2017 restriction applies ONLY to Division 40 (plant and equipment). Division 43 capital works deductions are not affected - you can still claim 2.5%/year on the construction cost of the building and structural elements
• New properties and off-the-plan: Division 40 restrictions do NOT apply to brand-new properties (first purchase from the developer, never previously used as a residential premise). New apartments and houses still offer full Division 40 deductions on all plant and equipment items - one of the key tax advantages of new vs established property
• SMSF exception: SMSFs are not subject to the 2017 restriction in the same way individuals are - specialist SMSF tax advice is required to confirm the precise position for your fund. Note that SMSFs face other restrictions on residential property (no personal use)

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A quantity surveyor's depreciation schedule provides a year-by-year breakdown of deductions. Understanding how to extract the right numbers for your tax return - and how to update the schedule when you make improvements - is essential.

• Schedule structure: typically shows Year 1 through Year 40, with Division 43 deductions (building allowance) and Division 40 deductions (plant and equipment) listed separately for each year. The total deduction for each year is the sum of both
• Year 1 pro-rating: if you purchased mid-year (e.g., purchased on 1 October and financial year ends 30 June), your first-year deduction is pro-rated based on the number of days held. Division 43 is pro-rated; Division 40 also uses a half-year rule in some circumstances
• Carrying forward the schedule: give your accountant the schedule each year. They extract the relevant year's deductions and enter them in your rental property schedule (Item 21 of the tax return). Do not simply re-use year 1 figures - deductions change each year under the diminishing value method
• Capital improvements update: if you renovate or add new plant after purchasing the property, notify your quantity surveyor or accountant. New capital works generate new Division 43 deductions (2.5%/year); new plant generates new Division 40 claims. An addendum to the existing schedule handles this without requiring a completely new report
• Ownership percentage: if you hold the property as tenants in common with a co-investor (50/50 or another split), each owner claims their proportional share of the depreciation deductions. The schedule shows the full property deduction - divide by your ownership percentage
• CGT cost base: Division 43 building allowances that you claim reduce the property's CGT cost base - every $10,000 of Division 43 claimed reduces the cost base by $10,000, increasing your capital gain on sale. This is a known trade-off: deductions now vs higher CGT later. For most investors, the present-value benefit of current deductions exceeds the future CGT cost

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The ATO actively monitors rental property claims through data-matching with property titles, bank records, and real estate data. Depreciation claims are among the most commonly adjusted items in rental property audits.

• Common ATO red flags for depreciation: claiming Division 40 on second-hand plant purchased after 7 May 2017 (in breach of the restriction); claiming depreciation on the owner's primary residence; using an unregistered quantity surveyor or preparing estimates without a formal report
• ATO data matching: the ATO receives information from rental property managers, state revenue offices, land title registries, and financial institutions. Claims that are inconsistent with ownership records, rental income, or property type are automatically flagged
• Industry benchmarks: the ATO uses property type and location benchmarks to assess whether depreciation claims are within a 'normal' range. A $5,000 depreciation claim on a 1950s weatherboard house may be questioned; a $20,000 claim on a brand-new inner-city apartment is expected
• Record retention: keep the quantity surveyor's report for at least 5 years after the property is sold (not just while you hold it). CGT calculations at sale require the accumulated Division 43 claims - if you cannot produce the records, the ATO may assume maximum Division 43 was claimed and reduce your cost base accordingly
• Repairs vs capital improvements: a common audit point is the distinction between 'repairs' (deductible immediately) and 'capital improvements' (depreciated over time). Replacing a broken hot water system with a new one is a capital improvement - not a repair. Patching a leaky roof is a repair. Incorrect categorisation is frequently adjusted in audits
• Quantity surveyor selection: choose a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors (AIQS) and who has specific tax depreciation experience. BMT Tax Depreciation, Washington Brown, and Depreciator are established providers - but many competent surveyors operate regionally. Avoid online-only 'instant estimate' services that don't conduct a physical inspection

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