Div 40 vs Div 43: A Practical and Memorable Guide to Depreciation for Property Investors

Most property investors feel confident choosing paint colours, tiles, or appliances — but when it comes to tax depreciation, many suddenly find themselves in unfamiliar territory. One of the most common questions we receive at BPTAX is:

“What’s the difference between Division 40 and Division 43, and how do I know which one applies?”

To answer this, let’s begin with a simple story.

A Light Story to Set the Scene

Imagine your investment property is a house shared by two very different personalities:

• Division 43 — calm, structural, dependable, and always quietly doing his job in the background.

• Division 40 — energetic, functional, and full of moving parts, responsible for almost everything that plugs in, turns on, or needs replacing.

  
  

Both contribute to the property’s value. Both support your rental income. But they operate under very different tax rules.

And understanding their roles is essential for accurate, compliant and optimised depreciation claims. Let’s explore the distinction properly.

1. Division 43 – Capital works (the structural backbone)

Division 43 covers the fixed, permanent and structural elements of a building — effectively the parts that make the property stand upright.

What Division 43 includes

• Foundations, walls, ceilings

• Roofing, brickwork, concrete

• Permanent tiling and bathroom structures

• Built-in cabinetry and benchtops

• Windows, doors, gutters

• Structural extensions and renovations

If removing it would cause material damage to the property, it is almost certainly Division 43.

Tax Treatment

• Deductible at a fixed 2.5% per year over 40 years

• Only the construction cost, not market value, is depreciable

• Applies to residential properties constructed after 15 September 1987

Division 43 is steady, predictable and forms the foundation of long-term tax planning for property investors.

2. Division 40 – Plant and Equipment (the functional components)

Division 40 applies to items that have their own function, are generally removable, and tend to wear out faster.

What Division 40 includes

• Hot water systems

• Air-conditioners

• Ovens, cooktops, dishwashers

• Carpets, blinds, curtains

• Ceiling fans, smoke alarms

• Security systems and garage motors

• Many types of lighting

If you can unplug it, unscrew it, replace it, or move it, Division 40 is typically responsible.

Tax Treatment

• Depreciated based on effective life, as set by the ATO

• Methods available:

  • Prime Cost, or

  • Diminishing Value (accelerated depreciation)

• Subject to balancing adjustments when disposed of

• Important limitation: for residential properties acquired after 9 May 2017, second-hand Division 40 assets are generally not depreciable unless newly installed by the owner.

Division 40 delivers faster deductions but requires careful compliance.

3. How to Distinguish the Two in Practice

Renovations often involve a mix of Division 43 and Division 40 items.Correct classification ensures accurate tax outcomes.

Scenario	Division 43	Division 40
Replacing entire kitchen cabinetry	✔ Structural	✘
Installing a new oven or dishwasher	✘	✔ Plant & equipment
Bathroom waterproofing and tiling	✔	✘
Installing new lighting fixtures (removable)	✘	✔
Replacing carpets	✘	✔
Replacing tiles or timber flooring	✔	✘

A single renovation may therefore produce two different depreciation categories, each with different rules, rates and eligibility.

4. Why This Distinction Matters

Correctly classifying Division 40 and Division 43:

• Maximises allowable depreciation

• Avoids incorrect or overstated deductions

• Reduces ATO audit risk

• Supports accurate reporting in line with TR 97/23

• Protects the long-term tax position of investors and SMSFs

For advisers, using the correct division also builds compliance integrity and ensures alignment with ATO expectations.

5. Professional Commentary

From an advisory perspective, the Division 40 vs Division 43 distinction often becomes most important when clients:

• Acquire older properties

• Conduct partial renovations

• Replace a mix of functional and structural items

• Operate within an SMSF or complex ownership structure

• Require allocation of costs between divisions for depreciation schedules

A disciplined approach — supported by invoices, construction details, and clear descriptions — ensures every component is correctly classified.

Conclusion

Division 43 and Division 40 work together to deliver the total depreciation benefit available to an investment property. One covers the structure, the other covers the functionality. When applied correctly, both help investors optimise deductions while maintaining strict compliance with tax law.