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  • Claiming a tax deduction for depreciating assets and other capital expenses

    Businesses can generally claim a tax deduction for capital expenses over a period of time.

    Businesses with a turnover from $10 million to less than $50 million may also be eligible for the instant asset write-off, which enables you to claim a deduction for the full cost of assets, under the relevant threshold, in the year they were purchased and used or installed ready for use.

    A capital expense is either:

    • the expense of a depreciating asset - this includes both the amount you paid for the asset and the expenses from transporting and installing it.
    • an expense associated with establishing, replacing, enlarging or improving your business.

    On this page:

    • Depreciating asset expenses
    • Other capital expenses

    Depreciating asset expenses

    A depreciating asset is an asset that has a limited life expectancy (effective life) and can reasonably be expected to decline in value (depreciate) over the time it is used.

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    Types of depreciating assets

    Examples include:

    • machinery and equipment
    • motor vehicles
    • furniture, carpet and curtains
    • computers.

    These assets can either be ones you already personally own and bring into your business or ones you purchase in your business to produce assessable income.

    Land, trading stock items and most intangible assets (for example, patents and trademarks) are not depreciating assets. However, certain improvements to land and fixtures on land are depreciating assets.

    You can generally claim an amount, as a deduction, for the decline in value (or depreciation) of depreciating assets, each year, over a number of years.

    If you are a sole trader or eligible partnership and you are using the cents per kilometre method for claiming a deduction for the business expenses of running a car, the amount you claim already includes depreciation. You can't claim depreciation again separately.

    Instant asset write-off

    Eligible small and medium sized businesses can write off the cost of a depreciating asset, in the year it is first used if the cost is under the relevant threshold. This is referred to as the 'instant asset write-off'. The instant-asset write-off thresholds and full details about what you can claim and how, are available in our instant asset write-off information.

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    Determining the effective life of depreciating assets

    You can use the effective life determinations we provide for many assets used by businesses or you can self-assess the effective life of the depreciating assets you use in your business, if you feel our effective life determination is not appropriate for your specific circumstances. If we don't make an effective life determination for an asset you use, you must self-assess the effective life.

    The effective life of an asset, will usually determine the number of years over which a deduction for depreciation can be claimed.

    If you use our effective life determinations, they will not be challenged in any audit process. If you self-assess the effective life of a depreciating asset, we may ask you to explain how you worked out the effective life.

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    Claiming a deduction for depreciation

    Generally, you can claim a deduction for the decline in value of depreciating assets each year over the effective life. You can also ‘pool’ (or group) most depreciating assets and then claim depreciation for the pool, which is simpler than depreciating the individual assets. However, if you're an eligible small business you can use the simplified depreciation method, which allows you to claim capital expenses for assets (up to a certain limit) in the year of purchase.

    The amount you can claim will generally be less if you:

    • own the asset for less than one year
    • only partly use the asset for business purposes. For example, if you use it for 60% business purposes and 40% private purposes, you can only claim 60% of its total depreciation.
    • own the asset for some time before you start the business. In this case, you must work out how much the asset depreciated before you started using it in your business and use the reduced value as the asset’s base value.

    There are exceptions to the general depreciation rules, such as those that apply to construction costs.

    You can use our Depreciation and capital allowances tool to help you calculate the deduction available from a depreciating asset, or claims you are entitled to for capital allowance and capital works purposes.

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    Other capital expenses

    Other types of capital expenses include:

    Certain start-up expenses immediately deductible for eligible small businesses

    From the 2015–16 income year, eligible small business entities can claim a deduction, in the income year in which the expenses happened, for the full amount of certain professional start-up expenditure that would normally be deductible over five years. The range of deductible start-up expenses includes professional, legal and accounting advice and government fees and charges.

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    Other business-related capital expenses

    Other business-related capital expenses you can claim a tax deduction for include the cost of setting up or ceasing a business (commonly known as black-hole expenditure) and project related expenses. However, this only applies if you haven't already claimed a deduction for them under any other part of the law.

    You can claim black-hole expenditure over five years.

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    Construction expenses

    You can claim a deduction over a number of years for the construction expenses of buildings and other capital works – such as structural improvements – that are used for producing income.

    The deduction is available for the following capital works:

    • new buildings or extensions, alterations or improvements to an existing building
    • structural improvements such as sealed driveways, fences and retaining walls
    • earthworks for environmental protection, such as embankments.

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    Website and software expenses

    If you create or maintain a website for your business, you may be able to claim the associated expenses as a deduction.

    You can depreciate the expenses of a website over time. If you have chosen to allocate expenditure on your website to a software development pool, the expenses will have an effective life of five years (if you incur them on or after 1 July 2015).

    Special rules apply to in-house software you acquire or develop for your business use.

    If your expense is:

    • in-house software – use the prime cost method to deduct the expense each year
    • included in a software development pool – deduct the different proportions of the expense each year.

    You can also claim a deduction for some ongoing expenses associated with running and maintaining your website in the year they occur. Examples include domain name registration fees and server hosting expenses.

    Example 1: Simplified depreciation rules for small business

    In June 2019, Jenna bought a $2,000 website hosting package for her small business. She also has to pay service fees of $50 a month and $50 each year for the domain name. Jenna can claim a deduction for:

    • $2,000 for the website hosting package in her 2018–19 tax return under the simplified depreciation rules
    • the monthly and yearly fees in the years these expenses occur.
    End of example

     

    Example 2: Software development pool

    Nguyen set up a software development pool in 2016 at the time when he set up his business’s first website. In August 2018, he paid $4,500 to update the software behind the website. He must allocate this expenditure to the software development pool. He can then claim a deduction for it over five years.

    End of example

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    Last modified: 19 Jun 2019QC 33866