A depreciation schedule is a report that lists every deduction a property will produce over its life and splits those deductions into two buckets: Division 40 plant and equipment (the removable, mechanical assets) and Division 43 capital works (the fixed structure). For a property developer who built the asset and intends to hold it, that schedule is worth more than it is for almost anyone else, and it is built differently. Most of the material online on depreciation schedules is written for a passive investor who bought a finished apartment, has no construction invoices, and needs a Quantity Surveyor (QS) to estimate what the building cost. The developer who built and kept the stock starts from actual costs, and as the first owner of brand-new plant, is not caught by the second-hand asset rules that gut most investors’ Division 40 claims.
This guide is for that developer. It is general information, not tax advice, and how any of it applies turns on your own facts, entity and asset classification. It covers what a depreciation schedule actually contains, how Division 40 and Division 43 divide up a construction contract, why being the first owner secures the full plant and equipment claim, how the numbers are calculated, how the split changes early-year cashflow on a hold, how depreciation feeds a build-to-hold feasibility, and how New Zealand differs. The Division 43 side has its own detailed reference in the Division 43 capital works guide for build-to-hold developers; this guide leans into the Division 40 plant and equipment side and the schedule as a whole. Numbers here are hedged on purpose: effective lives, thresholds and rates shift, and what reads correctly in mid-2026 may read differently in eighteen months.
What is a depreciation schedule, and why is a developer’s different?
A depreciation schedule is a forward-looking report, usually 40 years long, that sets out the annual tax deduction available on an income-producing property, separated into Division 40 plant and equipment and Division 43 capital works. The Australian Taxation Office (ATO) allows a deduction for the decline in value of depreciating assets used for income-producing purposes and, separately, a capital works deduction for the construction cost of the building itself. A schedule brings both together so the deductions can be dropped straight into a tax return each year.
The developer’s position differs from the investor’s in three ways that matter to the schedule.
First, the developer holds the actual costs. An investor who buys a completed building rarely knows what the slab, the framing or the air-conditioning plant cost, so the Australian Taxation Office (ATO) recognises a Quantity Surveyor (QS) as appropriately qualified to estimate those costs. The developer has the head contract, the progress claims and the consultant invoices, so the deductions can be built from real numbers rather than estimates.
Second, the developer is the first owner of the plant. That single fact is the difference between a full Division 40 claim and, for most second-hand residential buyers, no Division 40 claim at all.
Third, the developer’s entitlement depends on a prior question that the investor never has to think about: whether the property is held as trading stock or on capital account. Property held as trading stock produces no annual depreciation, because its cost is recovered through cost of goods sold when it sells. A build-to-hold asset on capital account, producing rental income, is the setting where a depreciation schedule earns its keep.
Division 43 versus Division 40: what does each one cover?
Division 43 covers the fixed structure; Division 40 covers the removable plant and equipment inside it. They are claimed separately, over different periods, and a developer who owns the completed asset can generally claim under both.
Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) gives a straight-line deduction for capital works: the slab, framing, roofing, brickwork, fixed walls, tiling, fixed joinery, driveways, retaining walls and similar structural elements. The standard rate is 2.5% per annum over 40 years, with a 4% per annum rate over 25 years for eligible Build to Rent (BTR) developments and certain short-term accommodation. The full mechanics, the trading-stock pre-condition and the Build to Rent (BTR) accelerated rate are covered in the companion Division 43 capital works guide, so this guide does not repeat them.
Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) covers depreciating assets: items that can be described as plant and that do not form part of the building’s structure. The Australian Taxation Office (ATO) describes depreciating assets as items that are separately identifiable, not permanent, likely to be replaced within a relatively short period, and not part of the structure of the building. In a residential build that typically means carpets, floating floors, blinds, ovens, cooktops, dishwashers, air-conditioning units, hot water systems, exhaust fans, smoke alarms and light fittings. In a commercial or mixed-use build it also picks up lifts, security systems, fire control assets, common-area fit-out and mechanical services.
The reason the split matters is timing. Division 43 releases its deduction slowly and evenly, at 2.5% a year for four decades. Division 40 releases faster, because plant and equipment has a shorter effective life, and because a developer can usually claim it on a diminishing value basis that front-loads the deduction into the early hold years. A dollar sitting in the Division 40 bucket is worth more to a developer’s after-tax return than the same dollar sitting in Division 43, purely because of when the deduction lands.
The classic error, examined later, is leaving Division 40 plant bundled inside the Division 43 base. A kitchen benchtop that is fixed to the building is Division 43; the freestanding oven and dishwasher are Division 40; the air-conditioning plant is Division 40. If the whole lot is claimed at 2.5%, the developer has quietly thrown away the front-loaded deductions that make a hold stack in its early years.
Why does a developer keep the full Division 40 claim when most investors cannot?
Because the developer is the first user of brand-new plant, the 2017 restriction on second-hand depreciating assets does not bite. This is the single biggest reason a developer’s depreciation schedule is more valuable than a second-hand investor’s, and most investor-focused content cannot lean on it, because its audience is exactly the group the restriction targets.
Under changes made by the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, from 1 July 2017 an investor generally cannot claim the decline in value of second-hand (previously used) depreciating assets in a residential rental property. If someone buys an established house, the existing air-conditioner, oven and carpets carry no Division 40 deduction for the new owner. The restriction was aimed at the practice of revaluing used assets on each sale.
The legislation carves out new residential premises. The Australian Taxation Office (ATO) confirms a taxpayer can claim the decline in value of new depreciating assets, including assets that came with a newly built property, where no one was previously entitled to a deduction and either no one resided at the property before acquisition, or the asset was installed and the property acquired within six months of it being newly built. A developer who builds a dwelling and holds it to rent is the first user of every asset in it, so the second-hand restriction has nothing to attach to. The full Division 40 deduction is available.
Two boundaries matter here. The first is commercial property: the second-hand restriction applies to residential premises, so it never touches an office, retail or industrial building. A developer buying and holding a commercial asset, or building one, is outside the rule entirely. The second is trading stock, and it is where developers trip. The Australian Taxation Office (ATO) illustrates the point with a worked example in which a buyer purchases an apartment from a developer four months after completion, and notes that the developer was not entitled to claim the decline in value of the depreciating assets because they were his trading stock. The developer’s first-user advantage only converts into deductions if the asset is held on capital account as an income-producing investment. If the property is trading stock, there is no annual Division 40 or Division 43 deduction for the developer at all, regardless of how new the plant is. Getting the capital-account question right first is the pre-condition, and it is covered alongside the income tax treatment of development profit in the income tax on property development profit guide.
How is Division 40 decline in value actually calculated?
Division 40 decline in value is worked out over each asset’s effective life, using one of two methods: diminishing value, which front-loads the deduction, or prime cost, which spreads it evenly. The developer chooses the method asset by asset, and for a build-to-hold project the choice is one of the few real levers over the shape of the early-year deductions.
Effective life is the period an asset can be used to produce income. A developer can either use the effective life the Commissioner determines, or make their own reasonable estimate. The Commissioner’s determinations are consolidated in the Income Tax Assessment (Effective Life of Depreciating Assets) Determination 2025, which commenced on 16 September 2025 and replaced the long-running 2015 determination. Effective lives for common residential assets tend to sit in a range: carpet is often taken at around eight to ten years, hot water systems and dishwashers around ten to twelve, and room air-conditioners in the range of ten to fifteen, though the current determination should be checked for any given asset rather than assumed. A shorter effective life means a higher annual rate and a faster deduction.
The two methods use these formulas, which the Australian Taxation Office (ATO) sets out with worked prime cost and diminishing value examples:
- Diminishing value: asset’s base value multiplied by (days held divided by 365) multiplied by (200% divided by effective life). The deduction is largest in year one and tapers each year as the base value falls.
- Prime cost: asset’s cost multiplied by (days held divided by 365) multiplied by (100% divided by effective life). The deduction is a flat amount each year across the asset’s life.
Take a $2,000 air-conditioning unit with a ten-year effective life, installed and producing income for a full year. Under diminishing value, the year-one deduction is $2,000 multiplied by 200% divided by 10, which is $400. In year two the base value is $1,600, so the deduction is $320, and so on down the curve. Under prime cost, the deduction is $2,000 multiplied by 100% divided by 10, a flat $200 every year for ten years. Same total over the life of the asset, very different timing. For a developer whose case for holding rests on early-year after-tax cashflow, diminishing value on the bulk of the plant is usually the stronger choice, though a developer expecting to be in a higher tax position later might prefer the flatter prime cost profile on some assets.
How do low-value pooling and the $300 write-off speed up the small assets?
Low-value pooling and the immediate write-off let a developer accelerate the many small assets in a build, turning a long tail of minor items into a fast deduction. On a residential project these two mechanisms often lift the first few years of Division 40 deductions more than any single large asset does.
The immediate write-off comes first. The Australian Taxation Office (ATO) allows an immediate deduction for a depreciating asset costing $300 or less where it is used to produce assessable income that is not from carrying on a business, which covers a typical rental hold. The catch is the set rule: an asset costing $300 or less cannot be written off immediately if it is one of a set, or one of several identical or substantially identical items, that together cost more than $300. Four matching $250 dining chairs bought together are treated as a $1,000 set, not four immediate deductions. Any Goods and Services Tax (GST) credit the developer claims reduces the cost first, so the $300 test is applied on the GST-exclusive figure.
Then there is the low-value pool. The Australian Taxation Office (ATO) allows assets under $1,000 to be grouped in a low-value pool and depreciated together. Two kinds of asset go in: a low-cost asset costs less than $1,000 to begin with, and a low-value asset has been depreciated on the diminishing value method and has written down below $1,000. Pooled assets are deducted at 37.5% per annum, and at 18.75% (half the rate) in the year an asset is first added, which recognises that it was only held for part of the year. On a residential build, a large share of the Division 40 plant, from blinds and exhaust fans to smoke alarms and light fittings, falls under $1,000 and can be pooled, so a developer who pools sensibly may pull a meaningful slab of the plant deduction into the first three or four years.
One trap worth flagging: the pool is a one-way door. Once a developer chooses to pool low-cost assets, all low-cost assets started in that year and future years must go to the pool as well. It is a deliberate choice, not a per-asset decision each year, so it belongs in the plan for the hold rather than as an afterthought at tax time.
What is actually in a developer’s depreciation schedule, and do you need a Quantity Surveyor?
A developer’s depreciation schedule sets out, line by line, the Division 43 capital works base and its 2.5% or 4% annual deduction, and every Division 40 plant and equipment asset with its cost, effective life, method and annual decline in value, usually projected across 40 years and often on both diminishing value and prime cost so the developer can compare. Whether a developer strictly needs a Quantity Surveyor (QS) to produce it is a more interesting question than the investor content lets on.
For the Division 43 capital works figure, a developer who has the actual construction costs does not have to commission a Quantity Surveyor (QS) estimate. The estimate exists to reconstruct costs the owner never had; a developer who built the asset has them. The Australian Taxation Office (ATO) accepts a claim based on actual construction expenditure where the developer holds adequate records of the construction cost. This is the most accurate and cheapest path, and it is only available to the party who built.
The Division 40 side is where a Quantity Surveyor (QS) still tends to earn the fee, even for a developer. The value is not in estimating costs, since the developer has those, but in the split and the classification: pulling the plant and equipment out of a lump-sum head contract, assigning each asset the right effective life from the current determination, and deciding what pools and what does not. A $6,000,000 residential contract can easily contain several hundred thousand dollars of Division 40 plant buried inside the builder’s contract sum, itemised nowhere. A tax depreciation Quantity Surveyor (QS) exists to find it. Schedules for a standard residential property may typically cost in the region of $300 to $800 plus Goods and Services Tax (GST), and the fee is generally deductible as a tax-related expense. The strongest position is usually a developer with actual-cost records for Division 43 and a Quantity Surveyor (QS) schedule that carves the contract into its Division 40 components.
Records matter more for a developer than for a buyer, because the developer is the source of truth. A defensible file typically holds the head construction contract and variations, progress claim certificates, all consultant invoices tied to the works, and a line-item allocation that separates Division 43 qualifying capital works, Division 40 plant and equipment, and the non-deductible items (land, demolition, general landscaping and site preparation). The Australian Taxation Office (ATO) generally expects records to be kept for at least five years from the date of the latest claim, which, for an asset depreciated across decades, means holding the construction file for a very long time. Coding the cost ledger correctly during construction, rather than reconstructing it years later, is the whole game. It also ties back to how the build was costed in the first place, which is why a well-structured construction cost plan is worth getting right before a brick is laid.
How much does the Division 40 and Division 43 split change early-year cashflow?
Splitting the contract properly, rather than lumping everything into Division 43, can lift a developer’s first-year deduction by half or more, because the extracted plant depreciates several times faster than the structure. On a long hold, that early-year uplift is where the after-tax case is usually won or lost.
Take an illustrative $6,000,000 residential construction contract on a build-to-hold apartment project, held on capital account and rented. Suppose the cost split works out roughly as follows: $5,200,000 of Division 43 qualifying capital works, $480,000 of Division 40 plant and equipment, and $320,000 of non-deductible items such as general landscaping, site preparation and demolition of a pre-existing structure. These figures are illustrative; every contract splits differently.
Claimed correctly, the year-one deductions might look like this:
- Division 43 capital works: $5,200,000 at 2.5% gives $130,000 in year one, and the same again each year for 40 years.
- Division 40 plant and equipment: $480,000, depreciated mostly on diminishing value with a chunk of low-value assets pooled, might return in the order of $100,000 to $120,000 in year one, front-loaded, then tapering.
That is a combined first-year deduction of roughly $230,000 to $250,000. Now suppose the developer had not extracted the plant and had simply claimed the whole $5,680,000 of deductible construction at 2.5%. That returns about $142,000 in year one, flat. The split has lifted the first-year deduction from about $142,000 to about $240,000, an uplift of roughly two-thirds, and the gap is widest in exactly the early hold years when a stabilising asset is under the most cashflow pressure.
The total deduction over the life of the assets is not conjured out of nothing: Division 40 assets fully depreciate within their effective lives, so the plant deductions are heaviest early and gone within a decade or so, while Division 43 grinds on at 2.5%. The point is timing, not total. For a developer modelling a hold on an internal rate of return (IRR) basis, moving deductions forward is worth real money, and the development cashflow modelling guide covers how those year-by-year movements feed a return.
How does depreciation interact with Capital Gains Tax when the developer sells?
The two divisions unwind differently on sale, and conflating them is a common and expensive mistake. Division 43 capital works deductions reduce the property’s Capital Gains Tax (CGT) cost base, so they increase the capital gain on exit. Division 40 plant and equipment is dealt with separately, through a balancing adjustment, and is generally kept out of the Capital Gains Tax (CGT) cost base for the building.
On the Division 43 side, the Australian Taxation Office (ATO) confirms that for buildings where construction was completed after 13 May 1997, capital works deductions claimed (or that could have been claimed) reduce the cost base and reduced cost base. Every dollar of Division 43 deduction claimed during the hold reduces the cost base by a dollar, so the eventual capital gain is a dollar larger. This is not usually a wash, because the deduction is taken at the developer’s full marginal rate today while the extra gain, if the 50% Capital Gains Tax (CGT) discount applies to an individual or trust holding longer than twelve months, is effectively taxed at half that rate on sale, and the developer holds the cash in the meantime. The interaction is set out in more detail in the Capital Gains Tax on property development guide.
The Division 40 side works differently, and the difference is easy to miss. When a depreciating asset used solely for a taxable purpose is sold or scrapped, the result is a balancing adjustment: broadly, the difference between the asset’s remaining written-down value and its termination value is brought to account as income or as a further deduction, rather than folded into the building’s Capital Gains Tax (CGT) cost base. Two practical consequences follow. Assets scrapped part-way through a hold, for instance plant torn out in a refurbishment, can generate an immediate deduction for the remaining value rather than a slow write-off. And because plant is on a different track from the structure, the developer cannot simply assume every deduction taken reappears as extra Capital Gains Tax (CGT) on exit. This is genuinely technical, the outcomes depend on the entity and the facts, and it is an area to model with an adviser rather than eyeball.
Does a depreciation schedule vary by state or territory?
No. Depreciation is federal. Division 40 and Division 43 both sit in the Income Tax Assessment Act 1997 (ITAA 1997), administered by the Australian Taxation Office (ATO), so the deduction on a given build is the same whether the property is in New South Wales, Victoria, Queensland, South Australia, Western Australia, Tasmania, the Australian Capital Territory or the Northern Territory. A developer does not need eight versions of a depreciation schedule, and any content implying the rules change at a state border is confusing depreciation with something else.
What does vary by state is the surrounding tax that shapes a hold: land tax, and the various state Build to Rent (BTR) land tax concessions, all of which are set by each state revenue office and differ markedly. Those are real feasibility inputs on a build-to-hold project, but they are separate from the depreciation schedule, and the state Build to Rent (BTR) concessions are dealt with in the companion Division 43 capital works guide rather than repeated here. The clean way to hold it in your head: the depreciation deduction is national, the holding taxes around it are state by state.
How does depreciation work for New Zealand build-to-hold developers?
New Zealand is a different regime, and for a developer it is currently far less generous on the building itself. Since the 2024-25 income year, buildings in New Zealand attract a 0% depreciation rate, so a New Zealand developer holding a completed building gets no depreciation on the structure. The fit-out and the loose plant are a different story and remain depreciable, which is where a New Zealand developer’s schedule now concentrates.
New Zealand does not have a Division 43-style capital works allowance. It taxes building depreciation directly, and the rate has moved around. Residential buildings have been non-depreciable (a 0% rate) since the 2011-12 year. Commercial and industrial building depreciation was reintroduced in 2020 as a stimulus measure, then removed again: the New Zealand Government set the depreciation rate for all buildings with an estimated useful life of 50 years or more to 0% from the 2024-25 income year. For most developers with a standard balance date that took effect from 1 April 2024. Inland Revenue keeps the buildings within the depreciation rules at 0% rather than treating them as non-depreciable property, which preserves depreciation recovery income if a building later sells above its tax book value.
What still depreciates in New Zealand is commercial fit-out and separately identifiable plant and chattels: air-conditioning, lifts, carpets, appliances, security and similar items keep their own depreciation rates under Inland Revenue’s general depreciation rate schedules. So a New Zealand build-to-hold developer’s schedule leans heavily on identifying and separately depreciating the fit-out and chattels, since the shell yields nothing. A New Zealand developer weighing a hold against a sale should also keep the bright-line test on New Zealand property in view, because the timing of any eventual sale carries its own tax consequence separate from depreciation.
How do you carry the depreciation stream into a build-to-hold feasibility?
Depreciation belongs in the after-tax layer of a hold model, not the development feasibility that runs to completion. A standard development feasibility ends at practical completion or at the sell-down. A build-to-hold project has a second life as a stabilised investment, and it is there, in the after-tax cashflow, that the Division 40 and Division 43 deductions do their work by reducing tax on rental income (or generating a tax loss in the heavy early years).
A defensible hold model usually carries these lines below the development feasibility: the annual Division 43 capital works deduction, the annual Division 40 plant and equipment deduction split by method, interest on the stabilised investment facility, deductible land tax and rates, deductible management, insurance and maintenance, assessable net rental income, and the resulting tax position at the entity’s effective rate. Sensitivity is worth running across the construction cost outturn, since it drives the depreciable base, across the Division 40 and Division 43 split, and across the hold period and exit timing, since those drive the time value of the deduction stream and the Capital Gains Tax (CGT) position on sale.
The depreciation figures themselves come off the Quantity Surveyor (QS) schedule or the developer’s own cost split; they are an input, not something a feasibility engine works out. What a platform like Feasly does with them is take the hold-stage numbers, deductions included, and return internal rate of return (IRR), net present value (NPV) and month-by-month cashflow, then let a developer flex the inputs in a sensitivity analysis to see how much the Division 40 front-loading actually moves the after-tax return. That is usually the more useful question than the headline deduction: not how big the deduction is, but how much it changes whether the hold stacks.
What do developers get wrong with depreciation schedules?
Most developer depreciation errors trace back to one of a handful of mistakes, and each is avoidable with the cost ledger set up correctly before construction starts. The Australian Taxation Office (ATO) treats property and construction as a focus area for compliance, and capital allowances sit inside that focus, so the downside is not only a missed deduction but an amended assessment.
The recurring ones worth naming:
- Claiming depreciation on trading stock. If the asset is trading stock rather than a capital-account investment, there is no annual Division 40 or Division 43 deduction, no matter how new the plant. The capital-account question comes first, every time.
- Leaving Division 40 plant buried in the Division 43 base. Claiming the whole contract at 2.5% is the most expensive quiet mistake in the list, because it throws away the front-loaded plant deductions. The plant has to be extracted and classified.
- Missing the pooling and $300 write-off. A long tail of sub-$1,000 assets left on 40-year lives, rather than pooled or written off, leaves early-year deductions on the table.
- Confusing the second-hand rules. The 2017 restriction applies to second-hand residential plant. It does not restrict the developer as first user of new premises, and it does not touch commercial property at all. Developers sometimes talk themselves out of a claim they are fully entitled to.
- Putting non-deductible costs in the base. Land, demolition of pre-existing structures, general landscaping and site preparation are not capital works. Bundling them into the Division 43 base inflates the claim and invites an adjustment.
- Mishandling the exit. Forgetting that Division 43 deductions reduce the Capital Gains Tax (CGT) cost base, or assuming Division 40 works the same way, produces a nasty surprise on sale.
- Thin records. For a developer, the records are the claim. A depreciation schedule built on a properly coded construction ledger is defensible; one reconstructed from memory two years after practical completion is not.
The through-line is that a depreciation schedule is not a form you fill in after the fact. For a developer, it is a product of decisions made during construction: how the contract is structured, how the cost ledger is coded, whether the asset is consciously placed on capital account, and whether the plant is pulled out and classified while the invoices are still fresh. Get that right, and the schedule is one of the largest standing deductions a build-to-hold developer will ever claim. For the capital works half of the picture in full, including the 4% Build to Rent (BTR) accelerated rate and the state land tax concessions that sit alongside it, the Division 43 capital works guide is the companion to this one.
This guide is general information for Australian and New Zealand property developers, not tax advice. Depreciation outcomes turn on the specific facts, the holding entity and the classification of the asset, and rates and thresholds change. Confirm the current position with the primary sources linked above and take advice on your own project before relying on any figure here.