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  • Decline in value of depreciating assets – individuals

    You may need to work out the decline in value of for tools, equipment and other depreciating assets you use for work.

    A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is in use. Tools, equipment and other items such as computers and books are depreciating assets.

    You can claim a deduction for the decline in value of depreciating assets you buy and use to earn your income as an employee. The amount you can claim as a decline in value deduction depends on all of the following:

    You will also need to choose, How to calculate decline in value.

    If you either change or combine methods for claiming expenses when working from home, we have specific advice to help you work out your deduction. See, Work from home office expenses and decline in value.

    Cost of depreciating assets

    The cost of a depreciating asset will help you to work out if you can claim either:

    Immediate deduction

    You can claim an immediate deduction for a depreciating asset you buy and use for work purposes, if:

    • the asset cost $300 or less
    • you mainly use it to produce non-business assessable income
    • the asset is not part of a set costing more than $300
    • the asset isn't one of a number of identical or substantially identical assets that together cost more than $300.

    You need to meet the conditions of all four tests set out above in order to claim an immediate deduction. These four tests are set out in more detail in $300 immediate deduction tests.

    See also:

    Decline in value of assets costing $300 or more

    You can claim a deduction for the decline in value of a depreciating asset over the effective life of the asset where the asset:

    • cost more than $300
    • forms part of a set that together cost more than $300.

    Depreciating assets that form part of a set that cost more than $300 aren't eligible for an immediate deduction. The set must be written off over its effective life. Items are generally considered to be part of a set if they are:

    • interdependent
    • marketed as a set
    • designed and intended to be used together.

    A set needs to have more than one depreciating asset. In some cases, a single depreciating asset may be made up of more than one item. You must decide on a case by case basis whether items form a set. Examples include books and tools.

    For assets that are identical or substantially identical, you need to work out whether their total cost is more than $300. Factors to consider include colour, shape, function, texture, composition, brand and design.

    Example – set of books

    Anh works as a lawyer at a suburban firm. She discovers a series of three books about conveyancing that would greatly help in her work. The series is marketed as a set, and each volume builds on the knowledge of the previous one. The three books are a set.

    The three books cost $600 together but can be bought separately for $200 each. Anh buys one book each month for three consecutive months in the same income year for a total cost of $600.

    Although the cost of each book is less than $300, Anh can't claim an immediate deduction for the books, because they are a set and the cost of the set is over $300.

    End of example

     

    Example – set of items part of a larger set

    Paula, a primary school teacher, hears about a series of twelve progressive reading books. The books are designed to develop children's reading skills in stages. Pupils move on to the next book only when they have successfully completed the previous book. The first six books are at a basic level while the second six are at an advanced level.

    Paula buys one book a month beginning in January and by 30 June she holds the first six books (the basic readers) at a total cost of $240. Because of the interdependency of the books, these six books are a set even though they can be purchased individually and form part of a larger set.

    An immediate deduction is available for each book because the cost of the set Paula acquired during the income year was not more than $300.

    If Paula acquires the other six books (the advanced readers) in the following income year, they would be regarded as a set acquired in that year.

    End of example

     

    Example – identical or substantially identical items

    Tahir is employed as a cabinet maker and he supplies his own tools for work. He buys 10, 300 mm F-clamps for $40 each. They are all from the same manufacturer.

    Each clamp is sold separately and comes in its own packaging. They have a total cost of $400.

    Tahir's 300 mm F-clamps are all identical as they are all from the same brand and have the same design, manufacturer and use. Tahir can't claim an immediate deduction.

    End of example

     

    Example – items not forming part of a set

    Mary buys some new tools for her work as a carpenter. She buys a shifting spanner, a boxed set of screwdrivers and a hammer for her toolkit. Each item costs $300 or less.

    While these tools may comprise or add to Mary's toolkit, they're not a set because they are not interdependent or designed to be used together. It would make no difference if Mary purchased the items at the same time and from the same supplier or manufacturer.

    An immediate deduction is available for all the items, including the screwdrivers. The screwdrivers are a set, as they are marketed as a set. However, as the cost is $300 or less the deduction is available.

    End of example

    Effective life of a depreciating asset

    The effective life of a depreciating asset is how long it can be expected to last from its start time. This involves consideration of how the asset will be used. We publish the effective life of most assets, that you may use to calculate the decline in value. These are updated and published annually. Alternatively, you can use your own estimate based on your expected usage pattern.

    See also:

    Start time of a depreciating asset

    The start time of a depreciating asset is when you first use it, or install it to use for any purpose, including a private purpose. Assets decline in value from their start time, but you can only claim a deduction for the decline in value when you start using it to earn employment income. If you first buy an asset for private use, then later use it to earn employment income, you need to work out the decline in value from the start time.

    This means that if you start using a depreciating asset for work purposes after its effective life has ended and it has fully declined in value, you can't claim any deduction in relation to the asset.

    Amount of use for a work-related purpose

    If you use a depreciating asset for both work and private purposes, you need to keep records (for example, a diary for a representative four-week period) to determine your work and private use.

    You can only claim a deduction for your work use of a depreciating asset, so you need to reduce your deduction for the decline in value to account for your private use.

    Example – work out the decline in value deduction adjusted to remove private use

    Julian is an employed as a gardener. During the 2020-21 income year, he buys an electric hedge trimmer for $280. Julian also uses the hedge trimmer at home when he is working in his own garden.

    Based on his records, he works out that he used the hedge trimmer 20% of the time for private purposes and 80% of the time for work purposes.

    As the hedge trimmer cost less than $300 and he uses more than 50% for work purposes, Julian can claim an immediate deduction for the cost it.

    However, he can only claim a deduction for his work-related use of the hedge trimmer. He calculates his deduction as:

    $280 × 80% = $224.

    End of example

    How to calculate decline in value

    You calculate the decline in value of a depreciating asset using either the:

    • prime cost method
    • diminishing value method.

    You can choose whichever method you prefer however, once you have made a choice, you can't change the method in future years.

    See also:

    Work from home office expenses and decline in value

    If you use either the shortcut or fixed rate methods to work out your deduction for home office expenses, the rate per hour includes your additional running expenses and some or all of the decline in value for depreciating assets.

    If you use a combination of methods or change the method you use calculate your deduction, you will need these records to work out the decline in value of your depreciating assets in future years.

    The shortcut method (80 cents per work hour) introduced due to COVID-19, covers all additional running expenses you incur as a result of working from home, including the decline in value of home office furniture and furnishings, phones, computers, laptops and other similar devices. This means there is no need to separately calculate the decline in value of these depreciating assets. However, this rate is only available for period from 1 March 2020 to 30 June 2021.

    Under the fixed rate method (52 cents per hour worked) the decline in value of home office furniture and furnishings is included in the rate. However, you need to separately calculate the decline in value of depreciating assets such as a phone, computer, laptop or other similar device you use for work purposes.

    If you use the actual expenses method, you can claim the decline in value of depreciating assets you use while working from home.

    Regardless of the method you choose to use, depreciating assets continue to decline in value so it is important to keep records such as:

    • receipts of any depreciating assets you use while working from home
    • how you calculated your work-related use of the asset
    • your decline in value calculations.

    This will ensure you can calculate the decline in value of your depreciating asset and claim a deduction for it in future income years if you change methods or you start using the assets for a work-related purpose when you work from home.

    See also:

    Combination of methods for home office expense

    The method you choose to use doesn't affect an asset's cost, start time, effective life or decline in value. For example, a $2,000 computer with an effective life of two years will decline in value over the two years regardless of how much:

    • you use the asset for a work-related purpose
    • you claim as a deduction.

    The method you choose to use does however, affect the amount you claim as a deduction.

    Example – Change in method

    Colin is a solicitor, he purchases a new desktop computer for his home office on 1 July 2020 at a cost of $1,970.

    From 1 July 2020 to 26 February 2021 he works from home five days a week excluding Christmas when he takes two weeks off.

    Using his records, Colin works out that he works at home an average of eight hours each day and he uses his computer for work purposes 30% of the time.

    From 27 February to 30 June 2021, Colin works from home one day a week. Over this 18 week period he averages eight hours of work when he works from home.

    Using the shortcut method for the period 1 July 2020 to 26 February 2021, Colin works out his claim for additional running expenses as:

    Total hours worked × shortcut rate (80 cents per hour)

    8 hours × 162 days = 1,296 hours (total hours worked)

    1,296 hours × 80 cents = $1,036.80

    Total deduction for shortcut rate method: $1,036.80

    Using the fixed rate method for the period 27 February to 30 June 2021, Colin calculates his additional running expenses as:

    Total hours worked at home × 52 cents per hour

    8 × 18 working days × 52 cents = $74.88

    To work out the decline in value of his desktop computer, Colin elects to calculate the decline in value of his computer using the diminishing value method.

    Base value × days held (see note) ÷ 365 × (200% ÷ effective life in years)

    $1,970 × (365 ÷ 365) × (200% ÷ 4 years) = $985

    Colin needs to account for the days that he used the shortcut method as he can't claim for the decline in value for that period. He must also account for the fact he only used the computer for work purposes 30% of the time.

    Days fixed rate method used = 124 days

    (this includes the days in this period he didn't work)

    Deduction for decline in value − days the shortcut method used

    $985 × (124 ÷ 365 days) = $334.63

    $334.63 × 30% work-related use = $100.39

    Total deduction for fixed rate method: $74.88 + $100.39 = $175.27

    Total deduction for 2020-21 income year

    Shortcut method + fixed rate method = Home office expense total

    $1,036.80 + $175.27 = $1,212.07

    Although Colin can’t claim the decline in value for the period from 1 July 2020 to 26 February 2021, Colin must calculate the opening adjustable value (base value) of the desktop computer for the 2021-22 income year if he intends to work from home and claim it as a deduction in that income year. He uses the depreciation and capital allowances tool to work out the decline in value of his desktop computer, including the base value for each year.

    Diminishing value – desktop computer

    Income year

    Opening adjustable value

    Decline in value

    Adjustable value at the end of year

    2020 – 2021

    $1,970.00

    $985.00

    $985.00

    2021 – 2022

    $985.00

    $492.50

    $492.50

    2022 – 2023

    $492.50

    $246.25

    $246.25

    2023 – 2024

    $246.25

    $123.46

    $122.79

    2024 – 2025

    $122.79

    $61.40

    $61.39

    2025 – 2026

    $61.39

    $30.70

    $30.69

    2026 – 2027

    $30.69

    $15.35

    $15.34

    2027 – 2028

    $15.34

    $7.69

    $7.65

    2028 – 2029

    $7.65

    $3.83

    $3.82

    2029 – 2030

    $3.82

    $1.91

    $1.91

    2030 – 2031

    $1.91

    $1.91

    $0.00

    If he works from home for one day per week in the 2021–22 income year and continues to use his computer for work 30% of the time, his decline in value deduction will be:

    Base value × days held ÷ 365 × 200% ÷ effective life in years

    $985 × 365 ÷ 365 × 200% ÷ 4 years = $492.50

    $492.50 × 30% work-related use = $147.75

    Colin must also keep the receipt for the purchase of his desktop computer along with records that show how he calculated his work-related use and his decline in value deduction.

    If Colin’s work at home pattern changes in the 2021-22 income year, he will have to keep a new record of his work-related use of his desktop computer.

    Note: In a leap year the days held is 366.

    End of example

     

    Example – Decline in value and the shortcut method

    Mithra works as an industrial designer and as part of her work she is required to purchase her own laptop. On 1 July 2020 she purchases a laptop for $4,000 and uses it immediately for work.

    On 1 July 2020 she works from home, and continues to do so until 31 March 2021. She returns to working in the office on 1 April 2021.

    Since working from home she has kept a diary record of her hours worked. Based on her diary she works out that the percentage use of laptop for work purposes is 65%.

    Mithra intended to claim the decline in value of her laptop using the prime cost method when she purchased the laptop. However, Mirtha also wanted to use the shortcut method for the nine months she worked from home. As the shortcut method includes the depreciation of her laptop, Mirtha needs to exclude it from her decline in value claim for the period she claims a deduction using the shortcut method.

    To work out the decline in value of the laptop, Mirtha looks up the effective life for a laptop. The laptop has an effective life of two years and starts depreciating from when the asset is first purchased.

    To calculate her claim using the prime cost method, Mirtha works out the value of the depreciation for the days she is not using the shortcut method. This is 91 days, as she worked from home for 274 days.

    Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)

    $4,000 × (365 ÷ 365) × (100% ÷ 2) = $2,000

    $2,000 × 274 ÷ 365 = $1,501.37

    $2,000 − $1,501.37 = $498.63

    Mithra would then need to account for her personal use of the laptop.

    $498.63 × 65% work use = $324.11

    To work out her claim using the shortcut method, Mirtha uses her diary records to calculate that she worked 1,300 hours from home from 1 July 2020 to 31 March 2021.

    1,300 hours × 80 cents = $1,040.00

    Total deduction for the 2020–21 income year

    Shortcut method + Prime cost decline in value of laptop (period prior to 1 March 2021) = Home office expense total

    $1,040.00 + $498.63 = $1,538.63

    If the 2021–22 income year went back to normal Mirtha would still have 1 year of effective life left to calculate her decline in value under the prime cost method. She has $2,000 (that is, $4,000 − $2,000 = $2,000) left to claim as a deduction for the decline in value of the computer.

    Mithra would then need to account for her personal use of the laptop (assuming it remains the same as the previous year).

    $2,000 × 65% work use = $1,300

    End of example

    See also:

      Last modified: 18 Jun 2021QC 63126