Capital Works vs Depreciation

When it comes to claiming depreciation on your rental properties, there are two factors that will be accounted for in a report. These are Division 40 (Plant and equipment) and Division 43 (Capital works).

Division 40: Plant & Equipment

Plant and equipment refer to items that are fixtures and fittings, usually known to be easily removable assets. Each item has an effective life that is measured in years which is set out by the ATO. This can be found within the document ‘Taxation Ruling TR 2019/5 – Income tax: effective life of depreciation assets’.

With Division 40 items, you can depreciate them using either the diminishing value or the prime cost method. Although the end value is the same, many individuals select the diminishing value method for depreciation as your items depreciate at a more rapid rate within the first few years.

For example, a dishwasher has an effective life of 10 years. It depreciates at a rate of 20% of its current value per annum until it reaches the value of less than $1,000. When the value is below $1,000 the depreciation rate increases to 37.5% (as per low value pooling).

Low Value Pool

A low-value asset is an asset that has depreciated over one or more years and now has a written-down value of less than $1,000, but only if you’ve previously worked out deductions for it using the diminishing value method.

You calculate the depreciation of all the assets in the low-value pool at the annual rate of 37.5%.

Immediate write off

Eligible plant and equipment items with a cost of $300 or less qualify for an immediate full deduction and have been applied accordingly in the calculations.

In contrast with the above, capital works items depreciate at 2.5% per annum over a 40-year period. For instance, if you repaint the building for $8,000 then the value of this figure will be evenly depreciated over a 40-year period, equating to $200 per annum. Thus, there is a clear distinction between these two elements of depreciation.