Capital Works Deduction
A deduction for the construction cost of a building or structural improvement, typically claimed at 2.5% per year over 40 years.
Capital works deductions (Division 43) allow property investors to claim a deduction for the original construction cost of a building or structural improvement on an income-producing property. The standard rate is 2.5% per year for 40 years (for buildings constructed after 15 September 1987), meaning you can deduct 2.5% of the building's construction cost each year. Older buildings built between 18 July 1985 and 15 September 1987 may qualify for a 4% rate.
Capital works deductions apply to the building structure itself (walls, floors, roof, foundations) and structural improvements (driveways, fences, retaining walls), but not to the land value. For an investment property purchased for $800,000 where the building component is valued at $500,000, the annual capital works deduction would be $12,500 (2.5% × $500,000).
Unlike plant and equipment depreciation, capital works deductions were not affected by the 2017 changes for second-hand properties — you can still claim capital works deductions on the original construction cost regardless of whether you are the first or subsequent owner. However, you need to know the actual construction commencement date and construction cost, which a quantity surveyor can estimate based on building plans, council records, and construction cost guides.
How it works
A capital works deduction, formally Division 43, lets you deduct the original construction cost of a rental property's building structure and structural improvements over time, rather than all at once. The standard rate is 2.5% of the construction cost per year, spread over 40 years, and applies to buildings constructed after 15 September 1987. Buildings constructed between 18 July 1985 and 15 September 1987 may instead qualify for a faster 4% rate. The deduction covers the building itself — walls, floors, roof, foundations — plus structural extras like driveways, fences, and retaining walls.
In practice, you need to know the building's actual construction cost and commencement date to calculate the deduction, which is separate from the land value shown on your purchase contract. Where the original cost isn't documented, a quantity surveyor can estimate it from building plans, council records, and historical construction cost guides, and that estimate becomes the basis for your annual claim on your tax return each year until the 40-year period runs out or you sell.
A key distinction from plant and equipment depreciation is that capital works deductions were unaffected by the 2017 rule change restricting second-hand plant and equipment claims — you can claim capital works on the original construction cost whether you are the first owner or a later one. The most common mistake is conflating capital works with plant and equipment depreciation, or attempting to apply the 2.5% rate to the land value instead of just the building component, which overstates the deduction.
Example: capital works on a $650,000 rental purchase
An investor buys a rental property for $650,000, and a quantity surveyor determines the building component (excluding land) is worth $400,000, built well after 15 September 1987.
The annual capital works deduction is 2.5% of $400,000, which equals $10,000 per year. Claimed consistently, that recovers the full $400,000 construction cost over the standard 40-year period.
Related Terms
Depreciation (Rental Property)
Tax deductions for the declining value of a rental property's building structure and plant & equipment (fixtures and fittings).
Negative Gearing
When the costs of owning an investment property (interest, expenses) exceed the rental income, creating a tax-deductible loss.
Cost Base
The total cost of acquiring and holding an asset, used to calculate the capital gain or loss on disposal.
Rental Income
Income received from renting out a property, which must be declared as assessable income in your tax return.