Tax Depreciation Schedule for Investment Property Australia: The Complete Guide

A depreciation schedule for investment property is a report prepared by a quantity surveyor that identifies every depreciable asset in your investment property and calculates the tax deductions you can claim each year: typically without spending any additional money. For many investors, it’s worth $3,000–15,000 in tax deductions annually. Most investors either don’t have one, or have an outdated one that’s leaving money with the ATO.

What Is Tax Depreciation on Investment Property?

The ATO allows investors to claim a tax deduction for the natural decline in value of a rental property’s structure and fittings over time. This is called depreciation, and it represents a real tax deduction you receive without paying anything in that year: it’s an accounting recognition that assets wear out and lose value.

There are two types of depreciation claims available to investment property owners:

• Division 43. Capital Works: The building structure itself (walls, roof, floors, concrete, brickwork). The ATO allows a deduction of 2.5% of the original construction cost per year, for 40 years from the date of construction. A building that cost $300,000 to construct generates $7,500/year in Division 43 deductions.
• Division 40. Plant and Equipment: The removable and mechanical assets within the property: carpet, blinds, hot water systems, air conditioners, dishwashers, light fittings, stoves, exhaust fans, security systems. Each asset has an individual effective life assigned by the ATO and depreciates at either the prime cost or diminishing value method.

Who Can Claim What: The 2017 Rule Change

The 2017 Federal Budget introduced a significant restriction that investors must understand:

Division 40 (Plant and Equipment): post-9 May 2017 rule: If you purchased an established (second-hand) residential property after 9 May 2017, you can only claim Division 40 depreciation on plant and equipment that you purchase and install yourself. You cannot claim Division 40 on the existing fixtures that came with the property when you bought it (the previous owner’s carpet, hot water system, blinds, etc.).

Division 43 (Capital Works) claims are not affected by this change: all investors can still claim the 2.5%/year building write-off on construction costs regardless of when they purchased, as long as the construction was completed after 16 September 1987.

What this means in practice:

• New property purchased after 9 May 2017: Full depreciation schedule: both Division 43 and Division 40. Best depreciation outcome.
• Established property purchased after 9 May 2017: Division 43 only (if built post-1987). Division 40 only on items you replace yourself after purchase.
• Property purchased before 9 May 2017: Full depreciation schedule on both Div 43 and Div 40 (grandfathered).

How Much Is a Depreciation Schedule Worth?

At a 39% marginal tax rate:

• $10,000 in depreciation deductions = $3,900 back from the ATO
• $15,000 in depreciation deductions = $5,850 back from the ATO
• $20,000 in depreciation deductions = $7,800 back from the ATO

A quantity surveyor depreciation schedule costs $600–900. If it generates $10,000+ in Year 1 deductions (and for any new property it should) the schedule pays for itself many times over in its first year. Over the 40-year life of a depreciation schedule, the total deductions can easily exceed $200,000–400,000 in nominal dollar terms.

What a Depreciation Schedule Contains

A quantity surveyor’s depreciation schedule (compliant with ATO requirements) includes:

• Property address and inspection date
• Construction cost estimate for Division 43 (the QS’s professional assessment: the ATO accepts this even when you don’t have the original builder’s contract)
• Itemised list of every plant and equipment asset with its individual effective life, opening value, and annual deduction
• Year-by-year depreciation forecast for 40 years
• Both prime cost and diminishing value methods calculated (you choose which to use in your tax return: diminishing value front-loads deductions)
• Low-value pooling for assets under $1,000 (accelerated write-off rules)

Do You Need a Quantity Surveyor?

Yes. The ATO requires that Division 43 construction cost estimates be prepared by a qualified quantity surveyor (or be based on the original builder’s contract). Accountants and investors cannot self-assess the construction cost: only quantity surveyors are recognised as having the expertise to make that determination. For Division 40, the QS itemises and values the plant and equipment during an inspection of the property.

Major ATO-recognised QS firms include BMT Tax Depreciation, Washington Brown, and Duo Tax. Online depreciation schedule services have also emerged: some are legitimate QS firms operating online, others are not. Ensure you use a member of the Australian Institute of Quantity Surveyors (AIQS) or a firm specifically endorsed by the ATO.

When to Order a Depreciation Schedule

• Immediately after settlement: Ideally before your first tenant moves in: the QS can inspect the property in its as-new condition and capture accurate fixture values
• After a renovation: Any significant renovation resets or adds to the depreciation schedule. A QS can assess the new value of replaced fixtures and construction costs
• If you bought an older property without a schedule: The QS can still assess retrospectively: they use construction cost indices to estimate the cost at the original construction date
• At tax time if you’ve never had one: You can amend prior year tax returns (up to 2 years) to claim depreciation you missed: or carry forward the missed deductions

Diminishing Value vs Prime Cost Method

The ATO allows you to choose your depreciation method: and the choice is significant:

Diminishing Value: Front-loads deductions. Higher deductions in early years, declining over time. Better for cash flow in the short term. You cannot switch methods once you’ve chosen. For most investors who want maximum early cash flow, diminishing value is preferable.

Prime Cost: Straight-line deductions. The same deduction every year for the asset’s effective life. Lower in early years, but the same in later years when diminishing value deductions have fallen significantly. Some investors prefer prime cost for predictability.

Frequently Asked Questions. Tax Depreciation Schedule

The depreciation schedule is one of the few truly free-money moments in property investment: you’re claiming a deduction for something that already happened (construction) without spending anything new. If you own an investment property built after 1987 and don’t have a current depreciation schedule, you’re leaving real money with the ATO every year.

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General Advice Warning: This article is general in nature and does not constitute personal financial advice. Please consult a licensed financial adviser before making investment decisions.