Claiming a tax deduction for depreciating assets and other capital expenses
Businesses can claim tax deductions for depreciating assets and other capital expenses.
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When to claim a deduction
Eligible businesses may be able to claim an immediate or accelerated deduction for the business portion of the cost of an asset using one of the tax depreciation incentives.
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.
Ensure you keep accurate and complete records of all expenses you want to claim deductions for.
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.
Types of depreciating assets
Examples include:
- machinery (machines and mechanical tools) and equipment, such as EFTPOS machines, welding machines, air purifiers, steam cleaners and laminators
- motor vehicles
- furniture, carpet and curtains
- computers and computer accessories, including keyboards
- landline phones and headsets
- mobile phones, tablets and styluses.
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.
If you purchase a mobile device (smartphone or tablet) to set up and use myGovID to access our online services in the course of running your business, you may be able to claim tax deductions for the business portion of those expenses. Refer to myGovID – claiming deductions for phone and internet expenses.
Land, trading stock items and most intangible assets (for example, trademarks as they are not intellectual property) are not depreciating assets. However, certain improvements to land and fixtures on land are depreciating assets.
For more information, see our Guide to depreciating assets 2022.
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.
Tax depreciation incentives
Eligible businesses may be able to claim an immediate or accelerated deduction for the business portion of the cost of an asset using one of these tax depreciation incentives:
We have prepared a high-level snapshot to help you work out how these incentives may apply to you. Refer to Interaction of tax depreciation incentives.
Determining the effective life of depreciating assets
The effective life of an asset is used to work out the number of years over which a deduction for depreciation can be claimed.
For most depreciating assets, you can use our effective life determinations or self-assess the effective life. If our determination is not appropriate for your circumstances, or we don't make an effective life determination for an asset you use, you must self-assess the effective life.
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.
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 (unless you're eligible to claim an immediate or accelerated deduction using a tax depreciation incentive).
If you choose to use the simplified depreciation rules, any depreciating assets for which you cannot claim an immediate deduction under a tax depreciation incentive must be allocated to a small business depreciation pool.
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.
Other capital expenses
Certain start-up expenses immediately deductible
Eligible businesses can claim a deduction for the full amount of certain professional start-up expenses in the income year the expenses occurred. The range of deductible start-up expenses includes professional, legal and accounting advice and government fees and charges.
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 tax law.
You can claim black-hole expenditure over 5 years.
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.
Website 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 5 years (if you incur them on or after 1 July 2015).
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: temporary full expensing
In January 2021, Jenna buys a $2,000 website hosting package for her small business. She also pays 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 2020–21 tax return under temporary full expensing
- the monthly and yearly fees in the years these expenses occur.
End of exampleRefer to TR 2016/3 Income tax: deductibility of expenditure on a commercial website
Software expenses
You can claim the expense of commercial off-the-shelf software as a deduction either:
- in the year you purchase it – if the software has an effective life of one year or less or you are eligible to claim an immediate deduction using a tax depreciation incentive
- over a number of years – if the effective life is more than a year.
Special rules apply to in-house software you acquire or develop for your business use.
If your expense is:
Example: software development pool
Nguyen is a sole trader who runs an interior design business. He set up a software development pool in 2019 when he set up his business's website. In August 2020, he paid $1,500 to have customised software developed to create bookings and store client information.
Nguyen must allocate this expenditure ($1,500) to a software development pool and claim a deduction over the next 5 years in his tax returns.
End of example