Does claiming for capital allowance affect Capital Gains Tax (CGT)?

We regularly still hear from some investors that they have chosen not to claim depreciation because "they will have to pay it back anyway" if/when they sell their property at some time in the future.

It is true that claiming for depreciation whilst owning an investment property does affect the future CGT calculations. However, it is important to understand how this happens, especially following changes to depreciation in the 2017 budget.

The key points to highlight are as follows:

Not all depreciation claimed is deducted from the cost base

Only Division 43 (capital allowance) claims are deducted from the base cost when calculating CGT

This fact is often overlooked by investors and accountants.  The depreciation of plant and equipment items (Division 40 deductions) are not subtracted from the cost base.  Ensuring that only Division 43 claims are deducted guarantees that profit is not over-stated and tax is not over-paid.

When it comes to second-hand properties, Division 40 (plant and equipment depreciation) is now offset against CGT at sale

In May 2017 the government announced that individual investors could no longer claim depreciation of second-hand residential property assets (Division 40 assets) as an annual tax deduction.

The deductions are not forever lost though.  These accumulated deductions can be claimed in total as a CGT offset. 

First owners of brand new investment properties can still claim their Division 40 deductions annually, and as mentioned above, those deductions do not come in to play when calculating CGT in the future.

Further considerations when assessing the impact of depreciation on CGT calculations

CGT discounts and exemptions

In many circumstances investors are eligible for certain CGT discounts and exemptions, the most common one being a 50% discount for properties owned by individuals for more than 12 months.  In these circumstances the impact of deducting previously claimed capital allowance deductions from the cost base is reduced.

Purchasing power of money over time

Cash in the hand today is always worth more than the same amount of money saved in the future.  Investors are typically better off accessing the depreciation benefits and boosting cash flow today, saving that money on a profitable sales transaction at some time in the future.

Opportunity cost

The additional cash flow created by claiming for depreciation can be used to pay down debt or reinvest.  This gives the cash today even greater value that money saved at sale.

Get specialist advice

For anyone still unsure about the impact of claiming capital allowance and depreciation on CGT we recommend speaking with our team on 1300 922 220, or with an accountant who specialises in property and wealth creation.


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About Mark Wilkins

Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.

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