Expenses you can claim over time
A capital expense is either:
- the cost of an asset that has a longer life (usually more than one income year)
- an expense associated with establishing, replacing, enlarging or improving the structure of your business.
Generally, you can't claim the total of a capital expense in the income year you pay for it. Instead, you normally claim an amount for the decline in value, or depreciation, each year over a number of years.
You can also ‘pool’ most capital assets and claim depreciation for the pool, which is simpler than depreciating the individual assets.
A small business with assets that cost less than $1,000 can claim the full amount in the year it incurred the expense.
You can ordinarily only claim a deduction for the depreciation of assets you legally own or are purchasing under a hire purchase agreement.
End of attention
Capital assets have a limited life expectancy (effective life) and can reasonably be expected to depreciate over the time you use them. They are also known as depreciating assets and include:
- electrical tools
- furniture, carpet and curtains
- motor vehicles
- plant and equipment
- improvements to land and fixtures on land, such as buildings, windmills and fences.
There is a general set of rules that applies across a variety of depreciating assets and certain other capital expenditure. Broadly, the effective life of the asset, expressed in years, will usually govern the number of years over which you will be required to apportion the cost (see General depreciation rules).
There are exceptions to the general depreciation rules, such as those that apply to construction costs in relation to capital works. Capital works include:
- improvements to land such as buildings, windmills and fences
- structural improvements
- environment protection earthworks.
You can generally claim capital works construction expenses over 25 years at 4% per year, or 40 years at 2.5% per year.
Other capital expenses
You can claim a deduction for certain other business-related capital expenses you incur, as long as you can’t claim a deduction for them under any other part of tax law. Examples include the cost of setting up or ceasing a business, commonly known as blackhole expenditure, and project related expenses.
You can claim blackhole expenditure over five years.
Phone us on 13 28 66 or talk to your tax adviser if you’re not sure whether an asset is a depreciating asset.
Assets that have a longer life – such as buildings, motor vehicles, furniture, machinery and equipment – are called capital assets. You may be able to claim certain small value assets in the year of purchase. Otherwise, you generally claim an amount for the decline in value, or depreciation, of the asset each year over a number of years.