Capital Works Deduction
Capital Works Deduction is the deduction available under Division 43 of the Income Tax Assessment Act 1997 for capital expenditure on the structural and fixed elements of a building or fitout. The ATO states that deduction rates of 2.5% or 4.0% apply to the construction costs, depending on the date construction began, the type of capital works, and the manner of use. It is distinct from Division 40, which covers the decline in value of depreciating assets such as plant and removable equipment.
Why It Matters
The split matters most in a fitout, because a single project usually contains both categories and they are deducted under different rules at different rates. The ATO is explicit that deductions for leasehold improvements, including shop fitouts, are capital works and cannot be claimed over their effective life or the term of the lease, but must be claimed at the statutory rate of either 2.5% or 4.0%, whichever applies. In broad terms:
- Capital works, Division 43: walls, ceilings, ducting, fixed partitions and similar structural or fixed elements.
- Depreciating assets, Division 40: ovens, chairs, POS terminals, removable joinery and similar plant.
How It Works
- Construction expenditure on the capital works is identified and the applicable statutory rate of 2.5% or 4.0% is applied over the relevant write-off period.
- The rate turns on when construction began, the type of capital works, and how the area is used, not simply on whether the premises are residential or commercial.
- Where actual construction costs cannot be determined, the ATO accepts an estimate from a quantity surveyor or other independent qualified person.
- Where the capital works are destroyed at the end of a lease, the ATO states a balancing deduction may be claimed in the income year in which the destruction occurs.
Common Use Cases
- Separating the structural and plant components of a commercial fitout
- Tenants assessing the tax position of leasehold improvements
- Make-good obligations at the end of a lease
- Establishing construction expenditure where original records are incomplete
Related Terms
Source: ATO, Capital works deductions, ato.gov.au (as at 26 August 2026). Classification of specific components is a question for your accountant. For how fitout projects are funded, see Fitout Finance in Australia.