Residential 4% Ends Soon

Act now for a capital works claim – time is almost up

On the 18th of July 1985, the Australian Taxation Office (ATO) introduced legislation which allowed property investors to claim capital works allowance (division 43), commonly known as building write-off, on residential properties.

Essentially this write-off allows residential property investors to claim a deduction for the wear and tear on the structural element of a building including items that are fixed to the structure.

Building write-off can be claimed at 4 per cent over twenty-five years for structures which commenced construction between 18/7/1985 and 16/9/1987. After this date the allowance adjusts to a rate of 2.5 per cent over forty years.

The 4 per cent capital works allowance will soon be exhausted for properties which fall within these dates.

For example, on the 1st of July 2010 a property investor purchased a residential property that commenced construction on the 1st of October 1986 and was completed on the 1st of April 1987.

BMT Tax Depreciation was able to determine that the original construction qualified for the 4 per cent building write-off. There was also a small $50,000 extension which took place in 1995 that qualified for the 2.5 per cent claim resulting in a $1,250 deduction per year.

The investor was able to claim 4 per cent of the historical construction cost, which was estimated at $180,000, excluding plant and equipment. This worked out to be $7,200 in building write-off deductions in the first year of ownership plus the $1,250 available for the extension. In the second year the owner was able to claim the final remaining portion of the original building write-off. In the third year there will be no original building write-off remaining. However, the $1,250 deduction available for the $50,000 extension will continue through to 2035. In addition, the depreciation available on the plant and equipment will also continue as can be seen in the table below.

Deductions Available Each Year
Financial Year 2010/2011 2011/2012 2012/2013
Capital allowance (4%) $7,200 $5,400 Nil
Capital allowance additions(2.5%) $1,250 $1,250 $1,250
Plant and equipment $6,700 $5,900 $5,200
Total depreciable amount $6,700 $5,900 $5,200

When purchasing an investment property, checking into the remaining building write-off will impact on the depreciation deductions and therefore, the property’s cash flow potential. If unsure, simply call BMT Tax Depreciation and one of our property depreciation experts will be able to assist.