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Assets and exclusions

How the simplified depreciation rules apply to assets and which assets are excluded.

Last updated 14 July 2024

When the simplified depreciation rules apply

The simplified depreciation rules apply to most depreciating assets.

These are assets that have a limited life expectancy (effective life) and can reasonably be expected to decline in value (depreciate) over the time they are used.

Depreciating assets include:

  • tools and equipment (for example, electric sanders and saws)
  • computers, laptops and tablets
  • office furniture (freestanding)
  • office equipment (for example, coffee machines)
  • motor vehicles (for example, cars, vans and tractors).

Some assets are excluded from the simplified depreciation rules or have specific treatment under the rules.

Excluded assets

A small number of assets are specifically excluded from the simplified depreciation rules. For these assets, you must use the general depreciation rules:

  • assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
  • assets you allocated to a low-value assets (pool) before using the simplified depreciation rules
  • horticultural plants, including grapevines
  • software allocated to a software development pool (but not other software)
  • assets used in your research and development (R&D) activities
  • capital works, including buildings and structural improvements.

For some primary production assets, you can use either the:

  • general depreciation provisions, or
  • simplified depreciation rules.

Cost of asset

Under simplified depreciation rules (including instant asset write-off), the cost of an asset includes both:

  • the amount you paid for it
  • any additional amounts you spent on transporting and installing it ready for use.

The cost also includes amounts you spent on improving the asset.

GST

Whether the goods and services tax (GST) amount is excluded from the cost of your asset depends on whether you are registered for GST.

If you are:

  • Registered for GST and can claim the full GST credit – you exclude the GST amount you paid on the asset when you calculate your depreciation amounts. The instant asset write-off threshold is exclusive of any GST. This is because you will claim as a credit the GST paid in your activity statement for the relevant period.
  • Not registered for GST – you include the GST amount you paid on the asset in your depreciation calculations and the instant asset write-off threshold is inclusive of GST.

If you are only able to claim a portion of the GST credit, then the cost is reduced by the portion you can claim.

For more information, see When you can claim a GST credit.

Trade-ins

When you trade-in a car or any other asset, the agreed price of your trade-in is usually deducted from the cost of your new asset. While the sale and purchase may appear as one transaction, there are 2 transactions for depreciation purposes:

  • purchase of a new asset
  • disposal of an existing asset.

If the purchase price of your asset (irrespective of the amount you were paid for your trade-in) is equal to or more than the relevant instant asset write-off threshold, then it can't be immediately written-off and must be added to the small business pool.

Note: For assets you start to hold, and first use (or have installed ready for use) for a taxable purpose from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023, the instant asset write-off threshold does not apply. You can immediately deduct the business portion of the asset under temporary full expensing.

Example: trade-in asset depreciation

Marilyn has a ceramic studio which qualifies as a small business. On 8 August 2023, Marilyn trades-in her old car for $11,000 and buys a second hand car (that is also used 100% for business purposes) at a cost of $25,000.

For depreciation purposes, there have been 2 transactions:

  • purchase of the new car for $25,000
  • sale of the existing car for $11,000.

Although only $14,000 out of pocket, she must add the car to the small business pool because it costs $25,000, which exceeds the relevant instant asset write-off threshold of $20,000.

Marilyn must both add the purchase amount and subtract the sale amount from her small business pool.

End of example

To work out car depreciation, see more information about the car cost limit.

Improvements to assets

Under the simplified depreciation rules, you depreciate improvements to assets.

If the improvement relates to an existing asset in your small business pool you simply add the improvement cost to your pool as a cost addition amount (along with costs incurred when disposing of, or permanently ceasing to use, an asset).

The improvement cost you can claim is limited to the business use proportion (taxable purpose proportion) of the original asset. This is the portion used to earn assessable income.

If you improve an asset that has been written-off under the instant asset write-off rules in a previous income year and the improvement cost is below the instant asset write-off threshold, the improvement cost is also written off. This is limited to the business use proportion of the asset.

The cost of any subsequent improvements can't be immediately deducted – instead they are placed into the small business pool.

Under the temporary full expensing rules, improvements made to an asset from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023:

  • are written off together with the asset's cost if you start to hold, and first use (or have installed ready for use) the asset for a taxable purpose in this period – no threshold applies to the cost of the asset or improvement
  • are written off if you have not previously made improvements to the asset and it was written off under the simplified depreciation rules (including instant asset write-off) in an earlier income year – no threshold applies to the improvement cost
  • can't be immediately deducted and need to be placed into the small business pool if you have previously deducted improvements costs for the asset. However, you deduct the balance of the small business pool at the end of an income year ending between 6 October 2020 and 30 June 2023.

This means if your income year ends on 30 June and the business portion of the cost of any improvements you make to an asset from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023 are immediately deducted.

Business versus private use

The amount that you claim as a depreciation deduction is determined by how much you use the asset to earn assessable income.

To determine whether the instant asset write-off applies you must consider the full cost of the asset, but your depreciation deduction is limited to the percentage your asset is used for business purposes. You can't claim a deduction for the portion of the asset used for private purposes.

Changes in business use

You must review how much an asset is used for business and other taxable purposes in each of the first 3 years.

If this proportion changes by more than 10% from your most recent estimate, you must make an adjustment.

Work out the adjustment using the following formula:

Adjustment = Reduction factor × Asset value × (Current year estimate - Last estimate)

The reduction factor depends on whether the asset was first used, or installed ready to use, for a taxable purpose when you were using the simplified depreciation rules. Use the following table to identify the reduction factor for each asset.

Table 1: To identify reduction factor for each asset

Reduction factor

For assets first used while you were not using the simplified depreciation rules

For assets first used while you were using the simplified depreciation rules

For the income year after you allocate it to the pool

0.70

0.85

For the second income year after you allocate it to the pool

0.49

0.595

For the third income year after you allocate it to the pool

0.343

0.417

The asset value is the asset's adjustable value at the time you first used it, or installed it ready for use, for a taxable purpose.

The difference between the current year estimate and the last estimate represents the change in your estimate of how much you will use an asset in your business and for other taxable purposes.

The last estimate is either your:

  • original estimate
  • previously adjusted estimate.

If the adjustment reflects an increase in the business or other taxable use proportion, you increase the opening pool balance, and your pool deduction for the year is increased. If the adjustment reflects a decrease in the business or other taxable use proportion, you reduce the opening pool balance, and your pool deduction for the year is reduced. 

Example: adjusting opening pool balance

Grace chooses to use the simplified depreciation rules in the 2017–18 income year. Before starting to use these rules, she had a car valued at $22,000 that she used for business purposes 60% of the time.

The car is not used for any other taxable purpose. Grace calculates $22,000 × 60% and includes $13,200 in her small business pool since the instant asset write-off threshold was $20,000 for the 2017–18 income year.

During the 2017–18 income year, Grace increases the usage of the car in her business from 60% to 75%. Because this is an increase of 15%, she must make the following adjustment to the opening pool balance for the 2018–19 income year:

  • Reduction factor × Asset value × (Current estimate − Last estimate)
  • 0.7 × $22,000 × (75% − 60%) = $2,310.

Grace increases the opening balance by $2,310 to reflect the change.

She must review her estimate of how much the car is used in her business and make any necessary adjustments (where the estimate differs by more than 10%) only for the first 3 income years up to and including 2019–20.

End of example

Assets used to earn non-business income

If you are a sole trader, you can claim a deduction for depreciating assets that relate to income that is not from your business. If you receive salary, wages or investment income, you can claim a deduction for depreciating assets associated with earning that income under instant asset write-off.

Later sale or disposal of asset

If you have claimed an immediate deduction for an asset (using instant asset write-off or temporary full expensing) and then sell or dispose of that asset, you need to include the taxable purpose portion of the amount you received for the asset in your assessable income for that year.

If you have claimed an immediate deduction for an asset (using instant asset write-off or temporary full expensing) for an asset that is later destroyed (for example, in a bushfire or flood) then the amount you receive (such as from an insurance payout) for the destruction of the asset is included in your assessable income.

Cars

There are different methods for claiming depreciation deductions for cars. However, if you deduct car expenses using the cents per kilometre basis, you can't also claim a deduction for the car under the simplified depreciation rules (as this method already allows for depreciation).

If you use the cents per kilometre method, you allocate the car to the small business pool with a business use percentage of 0%, resulting in a zero deduction for depreciation.

If you change from the cents per kilometre to the logbook method, you'll need to estimate a business use percentage. If the estimated business use is more than 10%, you must use the adjustment formula to adjust the opening pool balance.

If the car is owned or leased by a company or trust that qualifies for and has chosen to use the simplified deduction rules, its full cost will generally be depreciated under the simplified depreciation rules. In this case, any private use by you or other employees or associates will be subject to fringe benefits tax.

Example: changing car depreciation methods

Raoul begins business in September 2016 and chooses to use the simplified depreciation rules for the 2016–17 income year. In this first year, Raoul claims his car expenses on a cents per kilometre basis.

Given that he has chosen to use the simplified depreciation rules, the car is allocated to the small business pool with a business use percentage of 0% – so, he can't deduct depreciation for the car in that year.

In 2017–18, Raoul decides to claim his car expenses using the logbook method, which entitles him to claim depreciation for the car.

Raoul works out from his logbook that he uses the car 60% of the time for his business in 2017–18. The adjustable value of the car at the time he allocated it to the pool in 2016–17 was $22,000. Because there has been an increase of more than 10% in how much he uses his car in his business, Raoul must adjust the opening pool balance for 2017–18 using the adjustment formula.

Raoul increases the opening pool balance by:

  • 0.85 × $22,000 × (60% − 0%) = $11,220.
End of example

Car limit

There is a limit on the cost you can use to work out the depreciation of passenger vehicles (except motorcycles or similar vehicles) designed to carry a load of less than one tonne and fewer than 9 passengers. The maximum value you can use for calculating your claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car.

Table 2: Yearly car limit

Financial year

Car limit

ATO reference

2024-25

$69764

The indexation factor is 1.023, calculated as 445.7 divided by 435.5.

2023–24

$68,108

The indexation factor is 1.052, calculated as 435.5 divided by 413.8.

2022–23

$64,741

The indexation factor is 1.066, calculated as 413.8 divided by 388.1.

2021–22

$60,733

The indexation factor is 1.027, calculated as 388.1 divided by 377.9.

2020–21

$59,136

The indexation factor is 1.027, calculated as 377.9 divided by 368.1.

 

Example: applying the car limit

In July 2024, Laura buys a car for $75,000 (including GST) to use in running her business (which is not registered for GST). The car is a type to which the car limit applies.

As Laura bought the car in the 2024–25 financial year, when working out the car's decline in value for the 2024–25 income year, the first element of the cost of the car is reduced to $69,674.

End of example

For examples on how to apply the car limit, see Instant asset write-off for eligible businesses.

How the yearly car limit is calculated

The car limit is indexed annually in line with movements in the motor vehicle purchase sub-group of the consumer price index.

The indexation factor is calculated by dividing the sum of the index numbers for the quarters in the year ending 31 March by the same numbers for the quarters in the year ending on the previous 31 March.

The car limit amount is then indexed by multiplying it by the indexation factor unless the indexation factor is one or less.

For more information, see:

 

QC64425