Working out decline in value

General and specific rules for working out the decline in value of depreciating assets.

UCA general rules for decline in value

UCA contain general rules for working out the decline in value of a depreciating asset, and these rules are covered in this part of the guide.

The general rules do not apply to some depreciating assets.

UCA provide specific rules for working out deductions for the assets listed below:

• certain depreciating assets that cost $300 or less and that are used mainly to produce non-business assessable income; see Immediate deduction for certain non-business depreciating assets (costing $300 or less)
• certain depreciating assets that are eligible for Temporary full expensing of depreciating assets
• certain depreciating assets that cost or are written down to less than $1,000; see Low-value pools
• in-house software for which expenditure has been allocated to a software development pool; see Software development pools
• depreciating assets used in exploration or prospecting; see Mining and quarrying, and minerals transport
• water facilities, fencing assets, fodder storage assets and horticultural plants (including grapevines); see Primary production depreciating assets
• certain depreciating assets of primary producers, other landholders and rural land irrigation water providers used in landcare operations; see Landcare operations
• certain depreciating assets of primary producers and other landholders used for electricity connections or phone lines; see Electricity connections and phone lines
• trees in a carbon sink forest; see Carbon sink forests.

There are also specific rules for working out notional deductions for depreciating assets used in carrying on research and development activities; see Research and development tax incentive schedule instructions 2023.

When does a depreciating asset start to decline in value?

The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose. This is known as a depreciating asset’s start time.

Although an asset is treated as declining in value from its start time, a deduction for its decline in value is only allowable to the extent it is used for a taxable purpose; see Definitions.

If you initially use a depreciating asset for a non-taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset’s decline in value from its start time, including the years you used it for a private purpose. You can then work out your deductions for the decline in value of the asset for the years you used it for a taxable purpose; see Decline in value of a depreciating asset used for a non-taxable purpose.

Depreciation incentives

In 2020, the government introduced temporary tax incentives to help Australian businesses withstand the impacts of COVID-19. One of these temporary tax incentives was temporary full expensing. Temporary full expensing has now been extended for eligible businesses until 30 June 2023. Other than the extension, the operation of the regime remains the same.

For information about which of the depreciation incentives may apply to an asset in earlier income years, see Interaction of tax depreciation incentives.

Temporary full expensing of depreciating assets

Businesses with an aggregated turnover of less than $5 billion (or corporate tax entities satisfying the alternative test) may deduct the full cost of eligible depreciating assets if the assets were:

• first held after 7:30 pm AEDT on 6 October 2020, and
• first used, or installed ready for use, by them for a taxable purpose during 2022–23.

These businesses may also deduct the full cost of improvements to these new or existing eligible depreciating assets made during 2022–23.

Generally, to be eligible for the temporary full expensing incentive, a depreciating asset must be:

• first held, and first used or installed ready for use, for a taxable purpose, between 7:30 pm AEDT on 6 October 2020 and 30 June 2023 inclusive
• located in Australia and principally used in Australia for the principal purpose of carrying on a business, and
• not have a balancing adjustment event happen in the same income year.

Additionally, the depreciating asset:

• must not be excluded from the uniform capital allowance rules in Division 40 of the ITAA 1997 (such as a building or other capital works); or
• must not be subject to the capital allowance rules of the ITAA 1997    
  • in Subdivision 40-E (about low value and software development pools), or
  • in Subdivision 40-F (about primary production depreciating assets).
   

If your business has an aggregated turnover of less than $50 million, you can immediately deduct the cost of an eligible asset that is:

• an asset you started to hold after 7:30 pm AEDT on 6 October 2020 but you entered into a commitment to hold, construct or use the asset before that time; or
• a second-hand asset.

The car limit applies to limit the temporary full expensing deduction where a car is designed to mainly carry passengers.

If you start to hold an eligible asset and you first use the asset, or have it installed ready for use, for a taxable purpose in the same income year, you deduct in the income year the sum of:

• the asset’s cost and
• the costs of improvements incurred in the income year.

If you only start to use the asset, or have it installed ready for use, for a taxable purpose in an income year that is later than the year when you started to hold the asset, you deduct in that later income year the sum of:

• the asset’s opening adjustable value for that later income year, and
• the costs of improvements incurred in that later income year.

Small business entities that choose to use the simplified depreciation rules in an income year ending between 6 October 2020 and 30 June 2023 must apply temporary full expensing. If you do not want to apply temporary full expensing, you will need to opt out of the simplified depreciation rules during this period. However, you must still deduct the balance of your small business pool in the year you choose to opt out of the simplified depreciation rules.

For other entities that do not use the simplified depreciation rules, if an asset qualifies for an immediate deduction under temporary full expensing in an income year, you can make a choice to opt-out of temporary full expensing on an asset-by-asset basis for a particular income year. However, you must notify us in the tax return that you have chosen not to apply temporary full expensing to the asset for an applicable income year. The choice is irrevocable, and you must notify us by the day you lodge your income tax return for the income year to which the choice relates.

You may seek additional time to make a choice to opt out of temporary full expensing by writing to us.

For more information, see Temporary full expensing.

Methods of working out decline in value

You generally have the choice of 2 methods to work out the decline in value of a depreciating asset. These are:

• the diminishing value method, or
• the prime cost method.

Both these methods are based on a depreciating asset’s effective life. The rules for working out an asset’s effective life are explained in Effective life of a depreciating asset.

You can generally choose to use either method for each depreciating asset you hold. However, once you have chosen a method for a particular asset, you cannot change to the other method for that asset.

The Depreciation and capital allowances tool will help you with the choice and the calculations.

If you were carrying on a business in 2022–23, you may have the option of using Temporary full expensing depending on:

• your aggregated turnover
• whether you are applying the simplified depreciation rules, and
• when you hold and start to use the depreciating asset for taxable purpose.

However, small businesses using simplified depreciation rules must apply Temporary full expensing to their eligible assets.

If you are not carrying on a business, you may be able to claim an immediate deduction for certain depreciating assets that cost $300 or less; see Immediate deduction for certain non-business depreciating assets (costing $300 or less).

In other cases, you do not have a choice of which method you use to work out the decline in value. These cases are:

• If you acquire intangible depreciating assets such as in-house software, certain items of intellectual property, spectrum licences and telecommunications site access rights, you must use the prime cost method.
• If you acquire a depreciating asset from an associate who has deducted or can deduct amounts for the decline in value of the asset, see Depreciating asset acquired from an associate.
• If you acquire a depreciating asset, but the user of the asset does not change or is an associate of the former user, for example, under sale and leaseback arrangements, see Sale and leaseback arrangements.

If there has been rollover relief, see Rollover relief.

If the asset has been allocated to a low-value pool or software development pool, the decline in value is calculated at a statutory rate, see Software development pools and Low-value pools.

By working out the decline in value you determine the adjustable value of a depreciating asset. A depreciating asset’s adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time. See Cost of a depreciating asset for information on first and second elements of cost. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

You calculate the decline in value and adjustable value of a depreciating asset from the asset’s start time independently of your use of the depreciating asset for a taxable purpose. However, your deduction for the decline in value is reduced by the extent that your use of the asset is for a non-taxable purpose; see Decline in value of a depreciating asset used for a non-taxable purpose. Your deduction may also be reduced if the depreciating asset is a leisure facility or boat even though the asset is used, or installed ready for use, for a taxable purpose; see Decline in value of leisure facilities and Decline in value of boats.

The diminishing value method

The diminishing value method:

• assumes the decline in value each income year is a constant percentage of the base value each year for the effective life of the asset, and therefore,
• produces a progressively smaller decline in the item’s value over time.

Did you hold the depreciating asset before 10 May 2006?

Yes: For depreciating assets you held before 10 May 2006, the formula for the decline in value is:

base value × (days held ÷ 365) × (150% ÷ asset's effective life).

Use this formula for any asset you held before 10 May 2006, even if you disposed of it and reacquired it on or after 10 May 2006.

No: For depreciating assets you started to hold on or after 10 May 2006, the formula for the decline in value is:

base value × (days held ÷ 365) × (200% ÷ asset's effective life).

The base value:

• for the income year in which an asset’s start time occurs, is the asset’s cost
• for a later income year, is    
  • the asset’s opening adjustable value for that year, plus
  • any amount included in the asset’s second element of cost for that year.
   

Days held is the number of days you held the asset in the income year in which:

• you used it, or
• you had it installed ready for use for any purpose.

Days held can be 366 for a leap year, even though the denominator remains 365.

For information about balancing adjustment events, see What happens if you no longer hold or use a depreciating asset?.

You cannot use the diminishing value method to work out the decline in value of:

• in-house software
• an item of intellectual property (except copyright in a film)
• a spectrum licence, or
• a telecommunications site access right.

 

The prime cost method

The prime cost method:

• assumes the value of a depreciating asset decreases constantly over its effective life, and
• produces a consistent decline in the item’s value over time.

The formula for the annual decline in value using the prime cost method is:

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

The value of the asset's cost decreases every year by a constant amount. That constant amount is the actual cost divided by the number of years of effective life. In the first year, the value of the asset's cost is the actual cost of the asset.

If your asset cost $2,000 and has an effective life of 5 years, you can claim one fifth, 20%, of its cost, that is $400, in each of the 5 years, if you held the asset for the whole income year.

Days held is the number of days you held the asset in the income year in which:

• you used it, or
• you had it installed ready for use for any purpose.

Days held can be 366 for a leap year, even though the denominator remains 365.

For information about balancing adjustment events, such as the start and end dates, see What happens if you no longer hold or use a depreciating asset?

If there has been rollover relief and the transferor used the prime cost method to work out the asset’s decline in value, the transferee should replace the asset’s effective life in the prime cost formula with the asset’s remaining effective life, that is, any period of the asset’s effective life that is yet to elapse when the transferor stopped holding the asset; see Rollover relief.

An adjusted prime cost formula must be used if any of the following occurs:

• you recalculate the effective life of an asset; see Effective life of a depreciating asset
• an amount is included in the second element of an asset’s cost in an income year after the initial income year in which the asset’s start time occurs; see Cost of a depreciating asset
• an asset’s opening adjustable value is reduced by a debt forgiveness amount; see Commercial debt forgiveness
• you reduced the opening adjustable value of a depreciating asset that is the replacement asset for an asset subject to an involuntary disposal; see Involuntary disposal of a depreciating asset
• an asset’s opening adjustable value is modified due to GST increasing or decreasing adjustments, input tax credits for the acquisition or importation of the asset, or input tax credits for amounts included in the second element of cost of an asset; see GST input tax credits, or
• an asset’s opening adjustable value is modified due to forex realisation gains or forex realisation losses; see Foreign currency gains and losses.

You must use the adjusted prime cost formula for the income year in which any of these changes are made (the ‘change year’) and later years. Where the asset's remaining effective life is any period of its effective life that is yet to elapse either at the start of the change year or, in the case of roll-over relief, when the balancing adjustment event occurs for the transferor, the formula for the decline in value is:

opening adjustable value for the change year plus any second element cost amounts for that year × (days held ÷ 365) × (100% ÷ asset's remaining effective life)

The prime cost formula must also be adjusted for certain intangible depreciating assets you acquire from a former holder; see Effective life of intangible depreciating assets.

Decline in value of a depreciating asset used for a non-taxable purpose

You calculate the decline in value and adjustable value of a depreciating asset from the start time independently of your use of the depreciating asset for a taxable purpose. However, you reduce your deduction for the decline in value by the extent that your use of the asset is for a non-taxable purpose.

If you initially use an asset for a non-taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset’s decline in value from its start time including the years you used it for a private purpose. You can then work out your deductions for the decline in value of the asset for the years you used it for a taxable purpose.

 

Decline in value of leisure facilities

Your deduction for the decline in value of a leisure facility may be reduced even though you use it, or install it ready for use, for a taxable purpose. Your deduction is limited to the extent that:

• the asset’s use is a fringe benefit, or
• the leisure facility is used (or held for use) mainly in the ordinary course of your business of providing leisure facilities for payment, to produce your assessable income in the nature of rents or similar charges, or for your employees’ use or the care of their children.

Decline in value of boats

The total amount you can claim as a deduction for the decline in value of a boat that you use or hold cannot exceed your assessable income from using or holding that boat in 2022–23. If the total amount of your deduction exceeds the relevant assessable income, we reduce the deduction by the amount of the excess.

Exceptions to that reduction are:

• holding a boat as your trading stock
• using a boat (or holding it) mainly for letting it on hire in the ordinary course of a business that you carry on
• using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on, or
• using a boat for a purpose that is essential to the efficient conduct of a business that you carry on.

Depreciating asset acquired from an associate

If you acquired a depreciating asset from an associate, such as a relative or partner, and the associate claimed or can claim deductions for the decline in value of the asset, you must use the same method of working out the decline in value that the associate used.

If the associate used the diminishing value method, you must use the same effective life that they used. If they used the prime cost method, you must use any remaining period of the effective life used by them.

You must recalculate the effective life of the depreciating asset if the asset’s cost increases by 10% or more in any income year, including the year in which you start to hold it; see How to recalculate effective life.

You can require the associate to tell you the method and effective life they used by serving a notice on them within 60 days after you acquire the asset. Penalties can be imposed if the associate intentionally refuses or fails to comply with the notice.

Sale and leaseback arrangements

If you acquired a depreciating asset but the user of the asset does not change or is an associate of the former user, such as under a sale and leaseback arrangement, you must use the same method of working out the decline in value that the former holder used.

If the former holder used the diminishing value method, you must use the effective life that they used. If they used the prime cost method, you must use any remaining period of the effective life used by them. If you cannot readily ascertain the method that the former holder used or if they did not use a method, you must use the diminishing value method. You must use an effective life determined by the Commissioner if you cannot find out the effective life that the former holder used or if they did not use an effective life.

You must recalculate the effective life of the depreciating asset if the asset’s cost increases by 10% or more in any income year, including the year in which you start to hold it; see How to recalculate effective life.

Continue to: Immediate deduction for certain non-business depreciating assets (costing $300 or less)