Build quality and storeys: why the same floor area can give different capital works deductions

Division 43 of the Income Tax Assessment Act 1997 deducts a rental building on what it cost to construct, not on what it is worth or what the owner paid for it. For residential construction begun after 15 September 1987, the deduction is 2.5% of that cost a year for 40 years from completion, so whatever moves the cost moves the deduction in proportion, in every one of those years.

Where the cost is not known from a building contract or an earlier schedule, it is estimated, and the floor area is only the start. Our reports multiply the floor area by a rate per square metre for the year built and the state, then by factors for the kind of dwelling, how it is built, its build quality and, for a house or townhouse, whether it has more than one storey. This guide is about the last two. In our cost database, two houses of the same floor area, built in the same state in the same year, can differ in cost, and so in deduction, by up to 2.4 times between the lowest tier and the highest.

Our cost database sorts a house's build into four tiers: basic, a low-end build; standard, the average new house of its year and state; above standard, a high-end build; and premium, a prestige home. The standard tier is the rate itself, and each of the others is a factor on it, measured as basic 0.75, 25% below; above standard 1.426, 42.6% above; and premium 2.499, 149.9% above. The difference is in what each square metre buys: the finishes and fittings, the joinery and glazing, the ceiling heights, and how plain or intricate the design is.

Each factor was measured as a ratio within one published cost guide at a time, a guide's rate for the tier over its own rate for a standard house, so that one guide's prices are never set against another's. The basic factor rests on a single such ratio. The above standard factor rests on 19 such ratios, which ran from 1.167 to 1.573. The premium factor rests on 22 such ratios, which ran from 1.87 to 3.687. The basic factor, resting on the fewest, is the least certain of them. A tier is a band, not a measurement of one house, and the spread of the ratios shows how widely homes of one tier differ among themselves. The measured factor is the most our reports take: where a 2025 construction cost guide steps a state's capital less from its standard house to the tier, that state takes the smaller step, so a house is priced above standard from 1.197 in the Northern Territory to 1.426 in Queensland, Western Australia and South Australia; and premium from 1.674 in Tasmania to 1.898 in Queensland and Western Australia.

The table prices the state pages' sample house, 200 m², single-storey and brick veneer, built in 2025 at that year's rates, in each tier, less the builder's plant and the heating, cooling and ventilation, which a schedule lists separately as plant. Its standard column is the figure each state's page gives for a house built in 2025.

The tier moves the cost more than the state does. A standard house ranges from about $251,998 in South Australia to $429,277 in the Northern Territory, 1.7 times, where within a state the premium house costs from about 2.1 to 2.4 times the basic one. Between the cheapest house in the table, a basic one in South Australia, and the dearest, a premium one in the Northern Territory, the cost differs 3.9 times, and so does every year's deduction.

In our cost database a house or townhouse of two or more storeys is priced at 1.034 times the single-storey rate for the same floor area, 3.4% more, which allows for the upper floor's structure, the stair and the work at height. Next to build quality the step is small: the standard house in Queensland cost about $358,691 on one storey and $370,886 with the same 200 m² over two, where built above standard on one storey it cost $509,699.

The deduction follows the cost. At 2.5% a year, each figure below is the capital works deduction for a whole income year of 365 days on the house in the table above, the last column for the standard house built on two storeys. It is the same in each such year until the 40 years from completion run out.

A townhouse takes the storey factor as a house does, on top of a rate and tiers of its own. In our cost database, against a house of the same floor area and storeys, both built in 2025, a townhouse at the standard tier is priced at from 0.91 times its rate per square metre in the Northern Territory to 1.22 times its rate per square metre in South Australia; built above standard, it costs from 1.09 times its standard in Tasmania to 1.13 times its standard in Victoria, a smaller step than a house's in every state. The page for a townhouse in Tasmania prices one of two levels at the standard tier, for each year built.

A unit or apartment is priced differently. Its rate is set by the kind of building it is in, which carries its build and its share of the common structure, so neither the tiers nor the storey factor apply to it: against a single-storey standard house's rate per square metre, both built in 2025, a unit in a low-rise block is priced from about 0.92 times in Queensland to about 1.32 times in South Australia, and an apartment in a high-rise building from about 1.27 times in New South Wales to about 1.91 times in South Australia, its concrete frame, lift shafts and shared floors in that. The pages for a unit in Victoria and a unit in the Australian Capital Territory price the first, and those for an apartment in Tasmania and an apartment in the Australian Capital Territory the second. A well-finished unit may well have cost more than a plain one, but in our estimates its kind of building moves the figure and its finish does not.

Take a townhouse in the Northern Territory like the one its page prices: a two-level townhouse of 160 m², completed in 2015, bought by an individual and let from the first day of the 2026–27 income year. Built to the standard tier, it cost about $274,747 in our cost database, the figure that page gives for 2015. Taking it as finished on 30 June 2015, as our year pages do, the engine our reports use deducts 2.5% of that, about $6,869, in 2026–27, and about $199,135 in all over the 29 income years left of its 40, the last 2054–55.

Built above standard instead, the same townhouse cost about $304,926: about $7,623 in 2026–27, and $221,009 over the same years, $21,874 more for the same 160 m². Built on one level at the standard tier, it cost about $265,713 and deducts about $6,643 in 2026–27, $226 a year less than on two.

These figures are for illustration, to show how the build and the storeys carry through to the deduction; they are no estimate for any property. What a particular building gives turns on what it actually cost to construct, when its construction began, and the owner's own dates.

Where a building contract, a builder's price or an earlier depreciation schedule gives what the building actually cost, that figure comes before any estimate, and the tier does not arise. Where none does, the tier is a judgement read from what the building is: the finishes, fittings and joinery the photos show, the plans, an inspection report, the builder's specification or the agent's listing. A report should say which tier it took and on what, so the owner and their accountant can check it; ours show a tier other than standard, and a second storey, as a factor in the estimate's working, and say what each input rests on.

Storeys are read the same way, from the plans and photos, and a house is priced on one storey unless they show more.

This is general information about the law and our cost database, not advice on a particular property or a promise of any deduction. What a building cost, and so what it gives, turns on the building itself and its own documents, which are matters for the owner and their tax agent.