For a rental property, depreciation can involve both Division 40 (plant and equipment) and Division 43 (capital works).
Our calculator models Division 40 using diminishing value depreciation, the method that claims more in the early years and less as time goes on, while Division 43 is generally claimed at a fixed annual rate.
For tax purposes, the calculator splits your result into these two columns, shows a minimum and a maximum because construction costs are estimated based on the information available about the property, and applies your selected marginal tax rate to work out the tax savings column. It’s an estimate and a guide, built to give you a realistic range before you commit to a full schedule.
Below, we walk through exactly how each part of that results screen is worked out, including the diminishing value formula, low-value pooling, and how prime cost differs.
Why does the estimate show a minimum and a maximum?
This is the question we get asked most about the results screen. The range exists because your estimate is built from property type, size, age and quality, using reasonable assumptions about construction, fit-out and assets, rather than a detailed assessment of your specific property.
A full schedule involves a detailed assessment of the actual property and its depreciable components. That’s the difference between an estimate and a schedule: the estimate works from data about properties like yours, the schedule works from your property.
What are the Division 40 and Division 43 columns?
Division 40 covers removable plant and equipment. Division 43 covers the building structure. Those two columns cover the two halves of a depreciation claim, and the calculator keeps them separate because they’re claimed under different rules.
Across the five-year view, Division 43 is usually the larger of the two columns, and it typically makes up the large majority of a residential claim. Plant and equipment items like carpet, blinds and appliances have shorter effective lives and smaller individual values, so Division 40 tends to front-load a smaller portion of the total claim.
Since 9 May 2017, Division 40 deductions on previously used plant in second-hand residential property are restricted to the original owner or installer. If you’re buying an established property that hasn’t been renovated, that restriction limits what you can claim under Division 40 for plant and equipment already in the property when you bought it.
Brand-new depreciating assets you purchase and install yourself after settlement can generally still be claimed, subject to the normal rules.
What does “Division 43 Eligible: Yes” mean?
This flag depends entirely on when the building was constructed. Division 43 capital works are generally claimed at 2.5% a year for up to 40 years from original construction. That standard 2.5% rate applies to residential construction that started after 15 September 1987.
Construction between 18 July 1985 and 15 September 1987 generally still qualifies, at a 4% rate over 25 years instead. If your property was built before 18 July 1985, the original structure generally won’t attract capital works deductions, though any later renovations, extensions or fit-outs will.
The construction date is an important factor in determining whether capital works deductions are available, so it’s worth confirming it carefully rather than estimating it.
What is the diminishing value method?
Diminishing value depreciation calculates a deduction based on an asset’s declining value each year, rather than spreading the same amount evenly across its life. Because the deduction is calculated on what’s left of the asset’s value, not its original cost, the claim is largest in year one and gets smaller every year after that.
Here’s a simplified diminishing value depreciation formula, using a single asset like a carpet with an effective life of eight years, based on the ATO’s diminishing value method:
Base value × (200 ÷ effective life) = year one deduction
This is the formula for an asset held for a full financial year. If you acquire an asset partway through the year, the ATO’s actual formula includes a days-held factor, base value × (days held ÷ 365) × (200% ÷ effective life), so the first year’s claim is pro-rated to the number of days you’ve actually owned it.
Each year after that, the base value is reduced by the previous year’s deduction, and the same calculation runs again on the new, lower balance. That’s why diminishing value depreciation is sometimes called the diminishing balance method: the balance you’re depreciating shrinks every year, so the dollar amount shrinks with it, even though the percentage rate stays the same.
This is why diminishing value tends to suit investors who want their largest deductions sooner rather than spread evenly, and it’s also why a five-year snapshot on the results screen shows a curve that trends downward rather than a flat line.
What is low-value pooling?
The calculator’s disclaimer states it incorporates low-value pooling, and this is the second piece of the puzzle behind your diminishing value depreciation estimate. The ATO recognises two categories here: a low-cost asset is one that costs $1,000 or less when you buy it, and a low-value asset is one you’ve already been depreciating under the diminishing value method that has since dropped below $1,000 in written-down value. Both can be added to a low-value pool and depreciated together at set rates, rather than calculated individually.
In plain English: instead of tracking every low-value item separately, eligible items go into a single pool and get depreciated as a group.
The ATO sets this rate at 37.5% on the pool balance, with a half rate of 18.75% applying in the first year an asset joins the pool. A low value pool deduction still favours earlier years over later ones, it just does the maths across a group of assets instead of one at a time.
This is one of the more misunderstood parts of a depreciation estimate, because the pooling happens behind the scenes on the results screen. You’ll see the combined effect in your Division 40 total, not as a separate line item.
What about prime cost, the other method?
There are two depreciation methods available for plant and equipment, and prime cost is the one the calculator doesn’t model. Where diminishing value front-loads the claim, the prime cost method claims the same amount each year across the asset’s effective life, no front-loading, no curve. Plant and equipment are depreciated over its effective life, by the prime cost or diminishing value method.
Our calculator only models one of those two methods, diminishing value, so the figures on your results screen reflect that method specifically. A full depreciation schedule sets out the figures under both methods, diminishing value and prime cost, so you can see the difference side by side rather than choosing before you’ve seen the numbers.
Choosing between the two methods is a tax decision, not a quantity surveying one, so we don’t recommend one over the other here. Your accountant or adviser is best placed to work out which method suits your situation, based on your income, your plans for the property and your broader tax position.
Why does the estimate only show five years?
Five years gives you a readable snapshot, not the full picture. Division 43 capital works are generally claimed at 2.5% a year for up to 40 years from original construction, so a five-year window only ever shows a slice of a much longer claim period.
We’ve capped the estimate at five years because that’s the horizon most investors want to see when they’re deciding whether to get a schedule done. It’s not a sign the claim runs out after year five, a full schedule identifies the eligible deductions and their applicable claim periods, rather than limiting the analysis to a five-year estimate.
What does the tax savings column mean?
The tax savings column takes the deduction figure from your Division 40 and Division 43 totals and applies the marginal tax rate you selected when you ran the calculator. It’s a straightforward calculation, but the result is only as accurate as the rate you entered and the assumptions behind it.
This figure is an estimate based on the rate selected, and actual outcomes depend on your individual circumstances, including your total taxable income, any other deductions and your overall tax position for the year. For anything specific to your situation, that’s a conversation for your accountant or adviser, not something we can confirm from a calculator result.
Why is an estimate not a schedule?
It’s built to give you a realistic guide before you commit to the real thing, using reasonable assumptions based on property type, size, age and quality.
The ATO recognises quantity surveyors (TR 97/25) as appropriately qualified to estimate construction costs where actual costs are not known. That’s why a suitably qualified quantity surveyor can be used to estimate construction expenditure where the actual construction cost can’t be established, and it’s why the estimate step exists at all: to give you a sense of what’s worth pursuing before a surveyor assesses the property and locks in the actual figures.
An estimate is a guide. A schedule is the document your accountant works from.
Get a schedule that replaces the estimate with real figures
If your estimate looks worth pursuing, the next step is a full depreciation schedule based on an actual inspection of your property.
Residential schedules start from $450 plus GST, and reports are completed within 3 to 5 business days from receipt of all requested information and inspection completed.
Try the calculator or request a quote to get the process started.
