Decline in value deduction
Under tax law, you can claim certain deductions for expenditure you incur 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 you use 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. If you need help calculating your depreciation deduction for plant and software you bought before 1 July 2001, see Depreciation and capital allowances tool.
Since 1 July 2001, uniform capital allowances (UCA) apply to most depreciating assets, including plant. Under UCA, deductions for the cost of a depreciating asset are based on the decline in value of the asset.
Uniform capital allowances rules
UCA provide a set of general rules that apply across a variety of depreciating assets and certain other capital expenditure. UCA do this by consolidating a range of former capital allowance regimes. UCA replace provisions relating to:
- plant
- software
- mining and quarrying
- intellectual property
- forestry roads and timber mill buildings
- spectrum licences.
You use these rules to work out deductions for the cost of your depreciating assets, including those acquired before 1 July 2001. You can generally deduct an amount for the decline in value of a depreciating asset you hold to the extent that you use it for a taxable purpose.
However, an eligible small business entity may choose to work out deductions for their depreciating assets using the simplified depreciation rules, see Small business entity concessions.
Simplifying tax obligations for business
The Law Administration Practice Statement PS LA 2003/8 Practical approaches to low-cost business expenses, provides guidance for businesses. There are 2 straightforward methods you can use, if you're carrying on a business, to help determine whether you treat expenditure you incur in acquiring certain low-cost tangible assets as revenue expenditure or capital expenditure.
Subject to certain qualifications, the 2 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 GST. If you have a low-value pool, 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'll accept a deduction for expenditure you incur on qualifying low-cost tangible assets you calculate using this practice statement.
The UCA rules and where to start
When working out your deduction for the decline in value of a depreciating asset under UCA, you need to consider:
- Is your asset a depreciating asset covered by UCA?
See What is a depreciating asset? - Do you hold the depreciating asset?
See Claiming deductions for the decline in value of depreciating assets - Has the depreciating asset started to decline in value?
See When does a depreciating asset start to decline in value? - What method will you use to work out decline in value?
See Methods of working out decline in value - What is the effective life of the depreciating asset?
See Effective life of a depreciating asset - What is the cost of your depreciating asset?
See Cost of a depreciating asset - Must you reduce your deduction for any use for a non-taxable purpose?
See Decline in value of a depreciating asset used for a non-taxable purpose
Some of these questions don't apply:
- if you choose to allocate an asset to a pool
- if you can claim an immediate deduction for the asset
- to certain primary production assets
- to some assets used in rural businesses.
See, Working out decline in value.
Definitions for UCA terms
Definitions for the uniform capital allowances terms and comparison to the former depreciation rules.
|
Former depreciation rules |
UCA |
|---|---|
|
Plant |
Depreciating asset |
|
Own |
Hold |
|
Cost |
First and second elements of cost |
|
Luxury car limit |
Car limit |
|
Income-producing use |
Taxable purpose |
|
Depreciation |
Decline in value |
|
Undeducted cost |
Adjustable value |
Adjustable value: 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.
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.
Balancing adjustment amount: The balancing adjustment amount is the difference between the termination value and the adjustable value of a depreciating asset at the time of a balancing adjustment event.
If an asset’s termination value is greater than its adjustable value, the difference is generally an assessable balancing adjustment amount.
If the termination value is less than the adjustable value, the difference is generally a deductible balancing adjustment amount.
Balancing adjustment event: Generally, a balancing adjustment event occurs for a depreciating asset if you stop holding it (for example, if you sell it) or you stop using it and you expect never to use it again.
Car limit: If the first element of cost of a car exceeds the car limit for the income year in which you start to hold it, that first element of cost is generally reduced to the car limit. The car limit for 2024–25 is $69,674.
Days held: Days held is the number of days you hold the asset in the income year in which you use it or have it installed ready for use for any purpose.
Decline in value: Deductions for the cost of a depreciating asset are based on its decline in value. For most depreciating assets, you have the choice of 2 methods to work out the decline in value: the prime cost method or the diminishing value method, see Methods of working out decline in value.
Depreciating asset: 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 used.
Some assets are specifically excluded from the definition of depreciating asset, see What is a depreciating asset?
Effective life: Generally, the effective life of a depreciating asset is an estimate of how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income. You should, if relevant for the depreciating asset:
- have regard to the wear and tear from your expected circumstances of use
- assume the asset will be maintained in reasonably good order and condition
- have regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.
First element of cost: The first element of cost of a depreciating asset is, broadly, the amount paid (money or the market value of property given) or the amount taken to have been paid to hold the asset. It also includes amounts incurred that are taken to have been paid for starting to hold the asset. The amounts must be directly connected with holding the asset.
Holder: Only a holder of a depreciating asset may deduct an amount for its decline in value. In most cases, the legal owner of a depreciating asset will be its holder, see Who can claim deductions for the decline in value of a depreciating asset?
Indexation: Indexation is a methodology used to calculate the cost base of an asset for capital gains tax (CGT) purposes. It may be used for depreciating assets acquired and costs incurred before 11.45am AEDT on 21 September 1999.
Second element of cost: The second element of cost of a depreciating asset is, broadly, the amount paid (money or the market value of property given), or the amount taken to have been paid, to bring the asset to its present condition and location since you start to hold the asset. For example, costs incurred to improve the asset and expenses incurred on a balancing adjustment event occurring for the asset, such as advertising or commission expenses.
Start time: A depreciating asset’s start time is generally when you first use it (or install it ready for use) for any purpose, including a private purpose.
Taxable purpose: A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.
Termination value: Generally, the termination value is what you receive, or are taken to receive, for an asset as a result of a balancing adjustment event. For example, the proceeds from selling an asset would be the asset’s termination value.
Continue to: Depreciating assets, effective life, cost and decline in value
Return to: How to get the guide to depreciating assets