Division 40 itaa 1997

Updated March 2023

What is Division 40 itaa 1997 depreciating assets

Division 40 of the itaa is the ATO approved method to deduct the costs of plant and equipment assets in and on your investment property.

Who can prepare your Division 40 schedule?

Under ATO legislation, the industry professionals who can prepare your tax depreciation schedule (division 40 report), is a qualified and industry approved quantity surveyor.

Your Accountant is not qualified to prepare the report – unless they have access to the exact costs and installation dates of your plant and equipment items.

What is Plant and Equipment?

Plant and equipment is the loose items within and on your investment property.
This includes:

Just to name a few. I have a more comprehensive list here

What has changed in claiming deductions for division 40?

On July 1, 2017 the ATO (care of Federal Government Legislation) made massive changes to what property investors can and can’t claim tax deductions for under Division 40 of the itaa.

Previously, all investment properties were treated equal. New or old – Residential or Commercial – Renovated or Original.
They could all claim the tax deductions on plant and equipment items.

Today, second hand residential property has been segregated from the rest of the market.
Second hand houses can only claim deductions on plant and equipment for three reasons

  • the item was purchased brand new for the rental property
  • the property is owned in a company name
  • you made the house available for rent before 1 July, 2017

Methods of deduction in Division 40

Division 40 is broken into 4-subcategories.

  • Diminishing Value Method
  • Prime Cost Method
  • Low Value Pool Method
  • Minor Assets <$300 Method

Minor Assets <$300

Under (s 40-80(2) ITAA97) you can claim an instant asset write-off for plant and equipment items with a cost less than (or equal to) $300

My Caveat:
The low cost asset cannot be one of a number of substantially identical items acquired in the same income year that together costs more than $300.

Example: you can’t buy a table and chairs setting comprising 4x $200 chairs and a $300 table.

This is considered one item – or a set of items – and is only claimable in the Prime Cost or Diminishing Value method

This brings me to the next category

Low Value Pool Method

Low Value Pooling is for plant and equipment assets with a value equal to or less than $1,000.

Typical assets found in the low value pool are:

    • Blinds and Curtains
    • Light Shades
    • Smaller Electrical Appliances
    • Pumps and Motors
    • Ceiling and Exhaust Fans

…and many more

Prime Cost Method

Items with a value greater than $1,000 are claimed within the Prime cost method (or optional diminishing value method).

Here, each item is depreciated according to the ATO methodology of:
Base Value x 100% / effective life

Your quantity surveyor should provide both the Prime Cost Method and the Diminishing Value Method.

Diminishing Value Method

The diminishing value method is the alternative option to the Prime Cost method.
Where the Prime cost method has a set yearly deductible value, the diminishing value method has deductibles that reduce in value each year.

This may not sound ideal, but it’s actually the preferred method by virtually every good accountant.
That’s because you get to claim double the annual percentage deduction each year.
Where the Prime Cost method calculation is:

    • Base value x 100%/ Effective life

For Diminishing Value it’s:

  • Base value x 200%/ Effective life

Tip: make sure they send a qualified quantity surveyor to your house to do a physical inspection.
Many send an unqualified tick-sheet guy.
Some don’t send anyone at all!

What is Effective Life in Division 40

The ATO has set out the effective life of every depreciable asset found in an investment property. It’s advisable to follow the Commissioner’s guidelines, but you can self-assess the effective life of each asset. Just make sure your Quantity Surveyor can justify the change to the ATO.

Have any Questions?

Simply get in touch with me here and I’ll personally address any questions you have.

If you found this helpful, you may also find some of my other articles beneficial too. And to see some real life examples of what our clients have been receiving in tax depreciation deductions, check out our Client Portfolio page. But it’s usually best to start at the beginning

This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying

Published March 2023