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  • What is depreciation?

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    Under income tax law, you are allowed to claim deductions for expenses incurred in earning assessable income-for example, recurring expenses such as rent, wages and electricity. Some expenses, such as the cost of acquiring capital assets, are not allowable. Capital assets are those which provide a benefit over a number of years-for example, motor cars and machinery.

    The value of such assets gradually reduces over time as they approach the end of their effective lives. Assets which lose value in this way are said to depreciate. In recognition of this fact, the cost of capital assets used in producing assessable income can be written off over a period of time as tax deductions.

    Under income tax law, the term 'depreciation' is applied to plant-for example, cars and machinery. The depreciation provisions also apply to expenditure on computer software. Software includes a licence to use it.

    Under measures contained in New Business Tax System (Capital Allowances) Act1999 the depreciation provisions also apply to expenditure on an indefeasible right to use (IRU) an international telecommunications submarine cable system.

    The general depreciation provisions that apply to plant are modified for software and IRUs. This publication first covers the general provisions and then outlines the variations for software and IRUs.

    Last modified: 07 Jan 2005QC 27380