Capital Allowances
Deductions for the decline in value of depreciating assets are available under the Uniform capital allowance (UCA) system. In addition to the rules for depreciating assets, deductions are allowed for certain other capital expenditure.
Small business entities have the option of choosing simplified depreciation rules. Under these rules, small business entities can claim an immediate deduction if the cost is below the relevant threshold or else add the asset to the small business depreciation pool.
Land, trading stock and most intangible assets (excluding exceptions such as intellectual property and in-house software) are not depreciating assets. Buildings and other improvements to land may be eligible for deductions under the capital works regime.
The decline in value is generally calculated by spreading the cost of the asset over its effective life, using one of two methods:
- Prime cost method – decline in value each year is calculated as a percentage of the initial cost of the asset
- Diminishing value method – decline in value each year is calculated as a percentage of the opening depreciated value of the asset
MORE: Australian Taxation Office (ATO) Decline in value calculator.
For most depreciating assets, taxpayers can either self-assess the effective life, or use estimates published by the ATO. Taxpayers can recalculate, either up or down, the effective life of an asset if the circumstances of use change and the effective life initially chosen is no longer accurate. An improvement to an asset that increases its cost by 10% or more in a year may result in an obligation to recalculate the effective life of the asset.
Decline in value of cars is restricted to the car limit. From 1 July 2023, the luxury car tax threshold for luxury cars is $68,108 (it was $64,741 for the year commencing 1 July 2022). Luxury car leases are treated as a notional sale and purchase, with decline in value restricted to the car limit.
The decline in value of certain depreciating assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.
Changes for 2020 to 2023
From 12 March 2020 until 31 December 2020, the asset cost threshold for the instant asset write-off (which is usually only available to small business entities) was increased from $30,000 to $150,000 and the eligibility criteria expended to cover entities with an aggregated turnover threshold of less than $500 million (up from $50 million).
Further, from 12 March 2020 until 30 June 2021 the Backing business investment measure applied to businesses with aggregated turnover below $500 million and provided either:
- A deduction of 50% of the cost or opening adjustable value of an eligible asset on installation (existing depreciation rules apply to the balance of the asset's cost), or
- For businesses using a small business depreciation pool, a deduction of 57.5% of the cost of the asset in the first year, with the balance added the asset to the small business pool
In addition, from 6 October 2020 to 30 June 2023, full expensing applied to allow eligible businesses with an aggregated turnover of less than $5 billion to deduct the full cost of new eligible depreciating assets. For businesses with aggregated turnover of less than $50 million, full expensing also applied to eligible second-hand assets.
From 1 July 2023, these incentives no longer apply. However, it has been proposed to increase the instant asset write-off for small business entities from $1,000 to $20,000 for the period 1 July 2023 to 30 June 2024.