Tax Depreciation for Division 40 Items

Updated: March 2023

What is Division 40 in a Tax Depreciation Schedule

Today, we are looking at Division 40.

For more reading on Div 43 click here and for a Div 40 vs Div 43 comparison click here

Division 40 is for all items ‘easily removable’ from a building and are not attached or fixed.

One analogy goes like this:
If you could tip your house upside down all the Div 40 items would fall out leaving behind only the Div 43 items.

…yet there is a LOT of conjecture as to what is fixed and attached and what is not.

Div 40 items like light shades, appliances, floor finishes, even crockery & cuttlery can make a big differnece to your yearly tax deductions

Vinyl flooring, air conditioning units, light shades and many more items wouldn’t just ‘fall out’ of your house. Yet they are all considered plant and equipment items.

Regardless:

Plant & equipment items have been allocated individual life spans by the ATO. Technically known as ‘Effective Life’ each item can be depreciated for the extent of its life.

For example:
Carpet has an effective life of 8-years.
This means, you can depreciate the carpet at 12.5% p.a. for 8 years.

How’d I calculate that?
12.5% x 8 = 100%

But digging a little deeper, Plant & equipment items are broken down into 3-subcategories:

Items less than $300 in value (claimable as instant write-off in the financial year the expense occurred).
Low Value Pool Items (Items greater than $300 but equal-to or less-than $1,000 in value)
Prime Cost (items greater than $1,000 in value) [or] the Diminishing Value Method

Here’s What They Look Like:

Items Less than $300 (instant write-off)
This is where items such as smoke detectors, exhaust fans, cutlery trays, tidy bins and many more are categorised for instant tax deductions.

An example:
Say you purchase two new smoke detectors at $100ea and pay another $100 to have them installed.
The total cost is $300 and can be claimed at 100% write-off

But this doesn’t work for sets of items such as tables and chairs.

Maybe your outdoor setting costs $999 and while in-store you saw the individual chairs on sale for $299ea.
You can’t breakup that $999 invoice into multiple sub $300 invoices. It has to go into the Low Value Pool category as one item set (more info on that below).

But… had you actually purchased the chairs individually, one at a time, you could claim them as instant tax write-offs.

this is a clear example of how tax laws are strange and how you need someone who knows the tricks to maximise your deductions

Low Value Pool: Items <$1,000
Common items found in this category are things like loose furnishings, TV’s, appliances, garage door motors, pumps and so on.
How they’re calculated:
In the 1st year of use for ‘income producing purposes’ you can claim the depreciation at 18.75% of their fully installed value.
Each and every year thereafter, that same item depreciates at 37.5%

Note: In an ideal world you’d install these items on June 30. That way they’re only depreciating at the lower rate of 18.75% for 1-day before jumping up to 37.5%

Prime Cost:

Plant and equipment Items over $1,000 in value are put into the Prime Cost method of depreciation.
Each item has an effective life given to it by the ATO. From time to time these lives can be adjusted by the ATO to better reflect the real lifespan of items.

it’s typically Quantity Surveyors who lobby the ATO to amend effective lives to better benefit the property investor

One such example is Carpet

For many years the ATO has said carpet has an effective life of 10-years. But just recently the ATO shortened the effective life of carpet down to 8-years.

Items within the Prime Cost Method of depreciation have a set percentage portion at which they depreciate (decline in value) each year.

Using carpet as an example again:
If $4,000 worth of carpet depreciates at 12.5%p.a. the tax depreciation calculation will result in $500/yr in deductions each and every year until 100% of the $4,000 value is reached.

In the case of carpet it would be 8-years.

Diminishing Value Method: The Alternative to Prime Cost:
An alternative to the Prime Cost method is the Diminishing Value Method.
The same items that go into the Prime Cost Method go into the Diminishing Value Method.
You (or your accountant) chooses which one of these methods to use.

Benefit of Diminishing Value Method:
Basically, you can depreciate the same items but at double the rate of the Prime Cost Method.

Here’s that Carpet example again…
Instead of 12.5%p.a. on the $4,000 carpet you get 25%p.a. !

This is excellent for investment property owners who think they’ll sell the property within 6-years

The ATO allows owners of tax Depreciation Investment properties to claim 2x the yearly deductions but at a ‘diminishing’ value.

So unlike the Prime Cost method where there’s a set amount of depreciation each year, in the Diminishing Value Method each year the amount of depreciation reduces until eventually there’s nothing left to depreciate.

In the early years the Diminishing Value method far out performs the Prime Cost method. But after around 7-12 years the yearly deductions are neck and neck. And by around year 15 the Prime Cost Method is winning.

That being said:
The average length of ownership of an investment property is around 7-years. So taking full advantage of bigger deductions in the early years may be critical to your cash flow.

This is definitely something best displayed in a visual

So here’s a side-by-side comparison of Prime Cost Method V Diminishing Value Method

Note:In 2017, the Federal government introduced new tax laws which can affect the deductions available to some investment property owners with older properties. You can find out more here

For further reading on more of our quantity surveyor articles click here
Or to visit our home page for Brisbane tax depreciation services click here

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

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