The capital works deduction allows you to claim the cost of constructing the building itself as a tax deduction over time. It covers structural elements like walls, roofs, floors, doors, built-in cupboards, and other permanent fixtures that form part of the building. This is sometimes called the Division 43 deduction, after the section of the Income Tax Assessment Act that governs it.
Unlike plant and equipment (Division 40), which covers removable items, capital works covers the things you cannot take with you when you leave. The deduction is designed to recognise that buildings wear out over time, even if the land they sit on does not.
The Rate of Deduction
For residential properties built after 15 September 1987, the capital works deduction rate is 2.5% per year of the original construction cost. That means the deduction runs for 40 years. If the building cost $400,000 to construct, you can claim $10,000 per year as a deduction.
If you are not the original owner, the deduction is based on the original construction cost, not what you paid for the property. A quantity surveyor can estimate the original construction cost for older buildings where records are not available. For a walkthrough of the process, read our guide on how to calculate depreciation on your rental property.
What Qualifies
The deduction covers the building shell and structural improvements: foundations, framing, brickwork, roofing, plumbing and electrical work embedded in the walls, fixed cabinetry, and similar permanent elements. Extensions, renovations, and structural alterations also qualify from the date they are completed.
Why It Matters for Landlords
Capital works deductions are available on most investment properties built after 1985 and can be worth thousands of dollars each year. Because they apply to the building structure and run for 40 years, this is often the largest single depreciation deduction available. Getting a depreciation schedule prepared ensures you are claiming the full amount. Capital works deductions are one of the most valuable rental property tax deductions available to landlords.
propkt tracks your depreciation deductions alongside all your other property expenses so you can see the full picture of your property's tax position at any time. Try the depreciation calculator to estimate your potential deductions.