The chances are that your business will need to acquire capital assets to grow.
That could include:
- a building to run the business from
- plant and machinery to make goods
- fixtures, fittings and equipment to run an office
- motor vehicles so you and your staff can travel
For tax purposes, you can deduct the cost of any capital assets which your business acquires. This is called depreciation. In most cases, you deduct the cost over several years but in some cases, you can deduct the cost immediately.
For small businesses (with a turnover less than $10 million), there are simplified rules for depreciating assets. Different rules apply to non-small businesses.
The amount that you can write off is the cost to your business of acquiring the asset. In addition to the actual amount spent purchasing the asset (excluding GST), that also includes any delivery and installation costs and also any relocation costs, if the asset was previously kept somewhere else.
In some cases, market value is substituted for cost, for instance where an asset was gifted to the business at no cost or the asset was acquired at greater than market value through a non-arm’s length transaction (with a relative, for example).
For motor vehicles, deprecation can only be claimed on the cost up to the Expensive Car Limit. This changes each year but for 2024-25 it is $69,674. If the vehicle costs more than the limit, depreciation can only be charged on the cost up to the limit.
Effective life of an asset
The cost is written off for tax purposes over a period of several years which equates to the effective life of the asset to the business.
The Commissioner of Taxation publishes a comprehensive list of the effective lives of a myriad different types of assets (the current one is TR 2022/1).
There are two parts to the list the Commissioner produces; Table A lists assets which are specific to certain industries and Table B lists assets which are used more generally. You only use Table A if you are in the particular industry listed in the context of that asset. If you are using the same asset but in a different industry, use Table B.
The effective lives of commonly used assets are as follows:
- Computers – 4 years
- Laptops – 2 years
- Motor vehicles – 8 years (except taxis which are 4 years)
When working out the effective life of the asset you have acquired, most people use the Commissioner’s list, however you can also self—assess the effective life of an asset you are using in your business if you think the Commissioner’s estimate is incorrect.
To claim depreciation on an asset your business needs to meet three conditions:
- Your business must be the owner or quasi-owner of the asset (so assets financed under a HP contract are included, even though the financier might have secured the loan on the asset)
- The asset must be installed and ready for use (so if you’ve purchased an asset but not installed it or you’ve paid for an asset and it hasn’t been delivered, you’ll need to wait to make your claim)
- The asset must be used in the business. If the asset isn’t used in the business, no deduction is allowed and if it’s partially used in the business, you’ll need to apportion the depreciation between business and non-business use.
TIP: If you purchase assets just before the end of the tax year, make sure you have them installed and ready for use by 30 June otherwise you won’t be able to claim depreciation until the next tax year
Calculating depreciation for non-small businesses
There are two ways to calculate depreciation:
- The prime cost (or straight line method). Using this method, the cost is written off equally over the assets effective life. The formula for applying the direct cost method is:
Asset’s cost × (days held/365) × (100%/asset’s effective life)
For example, if I buy an asset for $10,000 with a five year effective life, I will claim:
$10,000 x (365/365) x (100%/5) = $2,000 depreciation each year.
This method will usually produce larger deductions in the later years of ownership compared to the diminishing value method.
- The diminishing value (or reducing balance method). Using this method, the base value of the asset diminishes each year as it is reduced by the amount of the previous year’s depreciation. The formula for applying the diminishing value method is:
Base value × (days held/365) × (200%/asset’s effective life)
Applying that formula to the example above, the depreciation over five years would look like this:
| Year | Opening base value | Depreciation | Closing base value |
| 1 | 10,000 | 4,000 | 6,000 |
| 2 | 6,000 | 2,400 | 3,600 |
| 3 | 3,600 | 1,440 | 2,160 |
| 4 | 2,160 | 864 | 1296 |
| 5 | 1296 | 518 | 777 |
Using this method, the higher deductions arise in the earlier years of ownership compared to the prime cost method.
You choose which method to apply by simply applying it in your tax return; no other claim or election is required.
Assets costing less than $100 can be written off immediately.
Special rules apply where you acquire (or develop) in-house computer software. This is written off over five years (ie, 20% per year on a prime cost basis). Alternatively, you can allocate all the software development costs to their own “pool” and write them off at the following rates:
Year 1 – Nil
Year 2 – 30%
Year 3 – 30%
Year 4 – 30%
Year 5 – 10%
In-house software is expenditure on acquiring, developing or commissioning software (eg systems and application software) for use within your business. If you stop using the software within five years of acquisition (and you haven’t used a software development pool), you can claim an immediate tax deduction for the unclaimed expenditure.
Calculating depreciation for small businesses (turnover < $10 million)
Any assets (including in-house software) costing less than the small business deprecation threshold amount are written-off immediately in the year they are bought and used or installed ready for use.
This threshold amount has varied considerably in recent years but is currently $20,000 (until 30 June 2025).
This is a great cash flow booster for small businesses since it allows investment on capital assets to be rewarded with an immediate deduction rather than being written off over several years. The downside is that the cash flow benefit all arises in the year of purchase, so future taxable income will be higher than where assets are depreciated over several years.
The entire cost of the asset must be less than the instant asset write-off threshold, irrespective of any trade-in amount. The rules apply irrespective of whether the asset is purchased new or second-hand.
In calculating the deduction, you can only claim in relation to the taxable purpose proportion in producing assessable income. For example, if an asset that is newly acquired for $8,000 is to be used 60% for business purposes, the deduction will be $4,800.
If it is to be used only for business purposes, the deduction will be $8,000. While only the taxable purpose proportion is deductible, the entire cost of the asset must be less than the threshold for a claim to be made in the first place.
If the asset for which an instant write-off has been claimed is later sold or otherwise disposed of, the taxable purpose proportion of the disposal proceeds later received for the asset must be included as income.
If the cost of an asset (other than a building) is the same as or more than the instant asset write-off threshold, the asset is placed into the small business pool and is depreciated at a rate of 15% for the first year (regardless of when the asset was purchased during the year) and 30% in subsequent years.
If the adjusted balance of the small business pool is less than the applicable instant asset write-off threshold for the year (currently $20,000) the whole pool balance must be written off.
Mark Chapman is director of tax communications at H&R Block.