The uniform capital allowance (UCA) rules:
- apply to most depreciating assets
- allow taxpayers to claim deductions for the decline in value of their depreciating assets that they use to produce their assessable income.
Small business entities who choose to use the simplified depreciation rules may instead choose to calculate their depreciation deduction using those rules.
Eligible businesses may be able to claim an immediate or accelerated deduction for the business portion of the cost of an asset that was first used or installed ready for use by you for a taxable purpose on or before 30 June 2023 using one of these temporary tax depreciation incentives:
The backing business investment and instant asset write-off incentives are not available to assets first used or first installed ready for use for a taxable purpose after 30 June 2021.
For a high-level snapshot to help you work out how these incentives may apply, see Interaction of tax depreciation incentives.
Under UCA, a depreciating asset starts to decline in value when you first use it (or install it ready for use) for any purpose, including a private purpose. However, a deduction for decline in value is only allowable for the period of time the asset is used for a taxable purpose.
This means if you initially use an asset for a private purpose, and in later years use it for a taxable purpose (such as in a business), you need to work out the asset's decline in value over the period of its private use before you can work out the decline in value for the period you used it for taxable purposes.
Example: working out start date of decline in value
Robyn purchases a car on 1 July 2021 for $25,000. She uses it entirely for private purposes until 1 March 2022 when she starts a new business. The car is then used wholly for business purposes.
The car starts to decline in value from 1 July 2021 because it is being used from that date, but no part of the decline in value is an allowable deduction before 1 March 2022. This is because the car is not used for a taxable purpose before that date.End of example
You decide whether to calculate the decline in value of a depreciating asset using either the:
In some cases, you must use the same method used by the former holder of the asset. For example, if you acquire the asset from an associate such as your spouse or business partner.
Once you choose a method to use for a depreciating asset, you cannot change it.
For some intangible depreciating assets, including an item of intellectual property, you must always use the prime cost method.
A deduction for the decline in value of a depreciating asset is reduced by the extent it is not used for a taxable purpose. For example, if an asset is used 40% of the time for a private purpose, the deduction for its decline in value is reduced by 40%.
You can claim an immediate deduction for certain depreciating assets that:
- cost $300 or less
- are used mainly to produce non-business assessable income
- are not part of a set costing more than $300, and
- are not one of a number of items that are identical, or substantially identical, that together cost more than $300.
Under the diminishing value method, decline in value is calculated using the asset's base value. The base value of an asset is the amount you paid for the asset plus any additional amount you spent on transporting, installing and improving it, less the decline in value up to the end of the prior income year.
If you started to hold the asset on or after 10 May 2006 the formula for the decline in value for an income year is:
If you started to hold the asset before 10 May 2006 the formula for the diminishing value for an income year is:
The diminishing value method:
- assumes the decline in value each year is a constant proportion of the amount not yet written-off
- produces a progressively smaller decline in value over time.
Example: calculating asset's decline in value using the diminishing value method
Colourful Pets Pty Ltd acquires an asset for $10,000 on 1 July 2021 and starts to use it wholly for taxable purposes from that day. The effective life of the asset is 10 years.
If Colourful Pets Pty Ltd chose to use the diminishing value method to calculate the asset's decline in value, the company's deductions in the first 2 years would be:
- 2021–22 income year: $10,000 × (365 ÷ 365) × (200% ÷ 10) = $2,000
- 2022–23 income year: ($10,000 − $2,000) × (365 ÷ 365) × (200% ÷ 10) = $1,600.
Under the prime cost method, the decline in value:
- is generally calculated as a constant percentage of the asset's cost
- reflects a uniform decline in value over time.
The formula is:
The asset's cost includes:
- the amount you pay for it
- any additional amounts you spend on transporting it and installing it in position
- amounts you spend on improving it.
In some circumstances, such as when you change the effective life or cost of an asset, an adjusted prime cost formula must be used.
Example: depreciating asset initially used for a non-taxable purpose
Paul purchased a fridge for $2,000 on 1 July 2020 and immediately used it wholly for private purposes as a second fridge.
He started a takeaway business on 1 March 2022, moved the fridge into his business premises and began using it for his business only. Paul does not use simplified depreciation rules for his depreciating assets.
Paul’s fridge started to decline in value from 1 July 2020 as that was the day he first used it. He needs to work out the fridge’s decline in value from the date he first started using it.
However, Paul can only claim a deduction for the decline in value from 1 March 2022 when he started using it for a taxable purpose.
Paul chooses to use the prime cost method to work out the decline in value and adopts the Commissioner's effective life determination for a fridge (10 years).
The decline in value will be $2,000 x (365 ÷ 365) x (100% ÷ 10) = $200 per year.
Before 1 March 2022, when the fridge was used for private purposes, the decline in value is $333, calculated as the sum of:
- $200 for the income year from 1 July 2020 and 30 June 2021 ($2,000 x (365 ÷ 365) x (100% ÷ 10) = $200)
- $133 for the 243 days from 1 July 2021 to 28 February 2022 before he started using the fridge for a taxable purpose ($2,000 x (243 ÷ 365) x (100% ÷ 10) = $133)
Paul cannot claim deductions for the $333 decline in value of the fridge for the period it was used wholly for private purposes.
He determines there are 122 days between 1 March 2022 and 30 June 2022 (inclusive) during which he used the fridge exclusively for his takeaway business.
Paul calculates his deduction for the fridge in the 2021–22 income year as follows:
$2,000 x (122 ÷ 365) x (100% ÷ 10) = $67
He will be able to claim a deduction of $67 for the decline in value for the fridge in the 2021–22 income year.End of example
For help calculating the deduction available from a depreciating asset, use the Depreciation and capital allowances tool.
The decline in value of a depreciating asset is generally based on the asset's effective life. The effective life is broadly the period it can be used by anyone for income-producing purposes. This assumes it will be:
- subject to wear and tear reasonably expected from the circumstances of use
- maintained in reasonably good order and condition.
You decide whether to make your own estimate of a depreciating asset's effective life or to adopt the Commissioner's effective life determination. In some situations, you don't have a choice.
For example, if you acquire the asset from an associate such as your spouse or business partner, you must use the:
- same effective life they used (if they used the diminishing value method)
- effective life that is yet to elapse (if they used the prime cost method).
For some intangible depreciating assets, such as intellectual property, you do not have a choice as the effective life is set out in the UCA rules.
If you use the Commissioner's effective life determinations, they will not be challenged in any audit process. If you estimate the effective life, we may ask you to explain how you worked it out.
If you choose not to adopt the Commissioner's determination of effective life, or there isn't one for your asset, you estimate the effective life as at the time it is first used or installed ready for use for any purpose. The estimate should take into account:
- how you expect to use the asset
- what rate of wear and tear you would reasonably expect from that use assuming the asset is maintained in reasonably good order and condition
- how long the asset could be used to produce income (irrespective of who used it)
- any proposal to scrap or abandon the asset that would cut short its use for income producing purposes.
You also need to take into account relevant factors such as the manufacturer's specifications, independent engineering information and your particular experience with similar assets.
You can choose to recalculate the effective life you are using for an income year if your circumstances of use change and the effective life you have been using is no longer accurate.
You can do this if you adopted the Commissioner's effective life determination or are using your own estimate. You can recalculate the effective life each time your circumstances change Also, if you improve an asset that results in its cost increasing by 10% or more in an income year, you are obliged to recalculate the effective life.
The decline in value of certain assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool at a diminishing value rate of 37.5%.
For an income year in which you acquire an asset and allocate it to the pool during the year, you work out its decline in value at a rate of 18.75%, or half the pool rate. See working out the decline in value of depreciating assets in a low-value pool.
The sampling rule is available to businesses that have a low-value pool.Work out how to calculate decline in value of depreciating assets and estimate effective life.