Assets and exclusions

When the simplified depreciation rules apply

The simplified depreciation rules apply to most depreciating assets.

These are assets that have a limited life expectancy (effective life) and can reasonably be expected to decline in value (depreciate) over the time they are used.

Depreciating assets include:

• computers, laptops and tablets
• motor vehicles (for example, cars, vans and tractors)
• office equipment (for example, coffee machines)
• office furniture (freestanding)
• tools and equipment (for example, electric sanders and saws)

Some assets are excluded from the simplified depreciation rules or have specific treatment under the rules.

Excluded assets

A small number of assets are specifically excluded from the simplified depreciation rules. For these assets, you must use the general depreciation rules for:

• assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
• assets used in your research and development (R&D) activities
• assets you allocated to a low-value assets (pool) before using the simplified depreciation rules
• capital works, including buildings and structural improvements horticultural plants, including grapevines
• software allocated to a software development pool (but not other software).

For some primary production assets, you can use either the:

• general depreciation provisions, or
• simplified depreciation rules.

Cost of asset

Under simplified depreciation rules (including instant asset write-off), the cost of an asset includes both:

• the amount you paid for it
• any additional amounts you spent on transporting and installing it ready for use.

The cost also includes amounts you spent on improving, disposing of or permanently ceasing use of the asset.

GST

Whether the goods and services tax (GST) amount is excluded from the cost of your asset depends on whether you are registered for GST.

If you are:

• Registered for GST and can claim the full GST credit – you exclude the GST amount you paid on the asset when you calculate your asset's cost. This is because you will claim a credit for the GST paid in your activity statement for the relevant period.
• Not registered for GST – you include the GST amount you paid on the asset when working out the asset's cost.

If you are only able to claim a portion of the GST credit, then the cost is reduced by the portion you can claim.

For more information, see When you can claim a GST credit.

Trade-ins

When you trade-in a car or any other asset, the agreed price of your trade-in is usually deducted from the amount you pay for your new asset. While the sale and purchase may appear as one transaction, there are 2 transactions for depreciation purposes:

• purchase of a new asset
• disposal of an existing asset.

If the cost of your new asset (including any amount you were credited for your trade-in) is equal to or more than the relevant instant asset write-off limit, it can't be immediately written-off and must be added to the small business pool.

Note: For assets you start to hold, and first use (or have installed ready for use) for a taxable purpose from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023, the instant asset write-off limit doesn't apply. You can immediately deduct the business portion of the asset's cost under temporary full expensing.

For more information, see Small business pool calculations.

To work out the car depreciation, see Car limit.

Improvements to assets

Under the simplified depreciation rules, you depreciate improvements to assets.

If the improvement relates to an existing asset in your small business pool, you simply add the improvement cost to your pool as a cost addition amount. You also add costs incurred when disposing of, or permanently ceasing to use, an asset to your pool as a cost addition amount.

The amount of any cost addition you can claim is limited to the business use proportion (taxable purpose proportion) of the original asset. This is the portion used to earn assessable income.

If you have a cost addition for an asset that has been written-off under the instant asset write-off rules in a previous income year, you can immediately deduct the cost addition amount under the instant-asset write off rules if:

• it is the first deductible cost addition amount incurred after the end of the income year in which the asset was written off
• the cost addition amount is less than the instant asset write-off limit for the income year.

Any subsequent cost addition amounts can't be immediately deducted – instead they are placed into the small business pool.

Under the temporary full expensing rules, improvements (or other cost additions) made to an asset from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023:

• are written off together with the asset's cost if you pay the improvement cost in the same year you start to hold, and first use (or have installed ready for use) the asset for a taxable purpose – no limit applies to the cost of the asset or improvement
• are immediately deducted if you have not previously made improvements to the asset and it was written off under the simplified depreciation rules (including instant asset write-off) in an earlier income year – no limit applies to the improvement cost
• can't be immediately deducted and need to be placed into the small business pool if you have previously deducted improvement costs for the asset. However, you deduct the balance of the small business pool at the end of an income year ending between 6 October 2020 and 30 June 2023.

This means if your income year ends on 30 June, the business portion of the cost of any improvements (or other cost additions) you make to an asset from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023 are immediately deducted.

Business versus private use

The amount of an asset's cost that you can claim as a depreciation deduction is determined by how much you use the asset for business purposes (taxable purposes).

To work out if you can immediately deduct the cost of a depreciating asset or cost addition under instant asset write-off, you must consider whether the full cost of the asset or cost addition is less than the relevant limit. However, your depreciation deduction is limited to the percentage your asset is used for business purposes. You can't claim a deduction for the portion of the asset used for private purposes.

Changes in business use

You must review how much an asset is used for business and other taxable purposes in each of the first 3 years after the year the asset was added to the small business pool.

If this taxable use proportion changes by more than 10% from your most recent estimate, you must make an adjustment. The adjustment is made to the opening pool balance of the small business pool containing the asset and must be made before you work out your small business pool deductions for the year.

Adjustment formula

Work out the adjustment using the following formula:

Adjustment = Reduction factor × Asset value × (Current year estimate − Last estimate)

The reduction factor depends on whether the asset was first used, or installed ready to use, for a taxable purpose when you were using the simplified depreciation rules. Use the following table to identify the reduction factor for each asset.

Table 1: To identify reduction factor for each asset

Reduction factor	For assets first used while you were not using the simplified depreciation rules	For assets first used while you were using the simplified depreciation rules
For the income year after you allocate it to the pool	0.70	0.85
For the second income year after you allocate it to the pool	0.49	0.595
For the third income year after you allocate it to the pool	0.343	0.417

The asset value is:

• if you used the simplified depreciation rules at the time you first used, or installed ready for use, the asset for a taxable purpose – the asset's adjustable value at that time.
• if you first used, or installed ready for use, the asset for a taxable purpose during an income year that you didn't use the simplified depreciation rules – use the asset's adjustable value at the start of the income year in which you allocated it to the small business pool.

The difference between the current year estimate and the last estimate represents the change in your estimate of how much you will use an asset in your business and for other taxable purposes.

The last estimate is either your:

• original estimate
• previously adjusted estimate.

If the adjustment reflects an increase in the business or other taxable use proportion, you increase the opening pool balance, and your pool deduction for the year is increased. If the adjustment reflects a decrease in the business or other taxable use proportion, you reduce the opening pool balance, and your pool deduction for the year is reduced.

Assets used to earn non-business income

If you are a sole trader, you may also be able to claim a deduction for depreciating assets used in producing income that is not from your business. If you receive salary, wages or investment income (in addition to your business income), you can claim a deduction for depreciating assets associated with earning that income under the simplified depreciation rules.

Later sale or disposal of asset

If you have claimed an immediate deduction for an asset (using instant asset write-off or temporary full expensing) and then sell or dispose of that asset, you need to include the taxable purpose portion of the amount you received for the asset in your assessable income for that year.

If you have claimed an immediate deduction for an asset (using instant asset write-off or temporary full expensing) for an asset that is later destroyed (for example, in a bushfire or flood) then the amount you receive (such as from an insurance payout) for the destruction of the asset is included in your assessable income.

If you stop using or dispose of an asset that is in your small business pool in the current year, you will need to reduce the small business pool balance by the taxable purpose proportion of the amount you received for the asset.

Cars

There are different methods for claiming depreciation deductions for cars. However, if you deduct car expenses using the cents per kilometre method, you can't also claim a deduction for the car under the simplified depreciation rules (as this method already allows for depreciation).

If you use the cents per kilometre method, you allocate the car to the small business pool with a business use percentage of 0%, resulting in a zero deduction for depreciation.

If you change from the cents per kilometre to the logbook method, you'll need to estimate the car's business use percentage for the small business pool. If the estimated business use is more than 10%, you must use the adjustment formula to adjust the opening pool balance.

If the car is owned or leased by a company or trust that qualifies for and has chosen to use the simplified deduction rules, its full cost will generally be depreciated under the simplified depreciation rules. In this case, any private use by you or other employees or associates will be subject to fringe benefits tax.

Car limit

There is a limit on the cost you can use to work out the depreciation of a car, known as the car limit. Cars are passenger vehicles (except motorcycles or similar vehicles) designed to carry a load of less than one tonne and fewer than 9 passengers. If the cost of your car in the year you start to hold it exceeds the car limit, the car's cost will be reduced to the car limit for that year.

Table 2: Yearly car limit

Financial year	Car limit	ATO reference
2025–26	$69,674	The indexation factor is 0.997, calculated as 444.3 ÷ 445.7.
2024–25	$69,674	The indexation factor is 1.023, calculated as 445.7 ÷ 435.5.
2023–24	$68,108	The indexation factor is 1.052, calculated as 435.5 ÷ 413.8.
2022–23	$64,741	The indexation factor is 1.066, calculated as 413.8 ÷ 388.1.
2021–22	$60,733	The indexation factor is 1.027, calculated as 388.1 ÷ 377.9.
2020–21	$59,136	The indexation factor is 1.027, calculated as 377.9 ÷ 368.1.

 

For more examples on how to apply the car limit, see Instant asset write-off for eligible businesses.

How the yearly car limit is calculated

The car limit is indexed annually in line with movements in the motor vehicle purchase sub-group of the consumer price index.

The indexation factor is calculated by dividing the sum of the index numbers for the quarters in the year ending 31 March by the same numbers for the quarters in the year ending on the previous 31 March.

The car limit amount is then indexed by multiplying it by the indexation factor unless the indexation factor is one or less.

For more information, see:

• Guide to depreciating assets
• GST and motor vehicles
• Deductions for motor vehicle expenses