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Deductions for the cost of depreciating assets

Last updated 3 March 2016

Under income tax law, you are allowed to claim certain deductions for expenditure incurred in gaining or producing assessable income, for example, in carrying on a business. Some expenditure, such as the cost of acquiring capital assets, is generally not deductible. Generally, the value of a capital asset that provides a benefit over a number of years declines over its effective life. Because of this, the cost of capital assets used in gaining assessable income can be written off over a period of time as tax deductions.

Before 1 July 2001, the cost of plant (for example, cars and machinery) and software was written off as depreciation deductions.

From 1 July 2001, the UCA applies to most depreciating assets, including plant. Under the UCA, deductions for the cost of a depreciating asset are based on the decline in value of the asset.

Simplifying tax obligations for business

The Commissioner has released ATO Practice Statement Law Administration PS LA 2003/8 - Taxation treatment of expenditure on low cost items for taxpayers carrying on a business. This practice statement provides guidance on two straightforward methods that you can use if you are carrying on a business to help determine whether you treat expenditure incurred in acquiring certain low-cost tangible assets as revenue or capital expenditure.

Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost tangible assets. The threshold rule allows an immediate deduction for qualifying low-cost tangible assets costing $100 or less, including any goods and services tax (GST). If you have a low-value pool (see Low-value pools), the sampling rule allows you to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost tangible assets that is revenue expenditure.

We will accept a deduction for expenditure incurred on qualifying low-cost tangible assets calculated in accordance with this practice statement.