ATO Depreciation

The ATO depreciation rates determine tax deductions which represent the decline in value over time of assets which are associated with your income-earning activities.

Black Hole ExpenditurePrimary Producers
Carbon Sink ForestsSelf assessment of effective life
Categories of depreciationSelf-assess effective life – proposed Amendment
Composite assets rulingSmall Businesses – 2017 & 2018
Determining effective lifeSmall Business 2016
Depreciation methodsSmall Business 2015
Depreciation of rental propertiesSmall Business Entities
Effective Life TablesSmall Business Depreciation
Instant asset write-offs 2012-13Software Development Pool
Immediate deductions – non-business taxpayersSoftware depreciation
Low Cost Assets Low Value PoolStatutory caps on effective life
Minerals exploration etc
Other capital expenditureFurther info and references

Budgets 2017 and 2018 Small Business Depreciation

Budget 2018: The government has extended the small business $20,000 asset write-off provisions for a further 12 months until 30 June 2019. Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019.

The deduction rules also apply to pool balances of less than $20,000 (as before).

The time extension also applies to the relaxation of 5-year lock-out rule, enabling re-entry of small businesses to the increased threshold arrangements, who would otherwise be barred through having previously opted out.

Only a few assets are not eligible (such as horticultural plants and in-house software).

Budget 2016 – Small Business Depreciation

budget-2016_17 A Budget 2016 proposal provides that the small business entity turnover threshold will be increased from $2 million to $10 million from 1 July 2016, with access to the instant write off for equipment purchases of up to $20,000 (initially expiring 30 June 2017, but since extended) along with other small business concessions (excluding CGT). The amending legislation is here: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

Budget 2015 – Small Business and Primary Producers

Budget 2015: The 2015 Budget has provided a fresh regime of accelerated depreciation (instant asset write-off) concessions for Small Businesses which take immediate effect:

  • Instant asset write-off: Small businesses to get immediate deduction for the cost of assets acquired which are less than $20,000 (up from the current $1,000) to be available from 7.30 pm 12 May 2015 initially until 30 June 2017 but since extended).
  • A small business year-end asset low value pool balance of less than $20,000 can also be fully deducted. See more here.
  • from 1 July 2015 Small Business start-ups will be able to immediately deduct professional costs associated with starting a business rather than writing them off over five years as currently – see black hole expenses

Assets such as horticultural plants and in‐house software for which specific depreciation rules already apply are excluded.

The current 5-year bar on re-entry to simplified depreciation after opting out is suspended.

For Primary Producers (see more below):

  • from 1 July 2016 12 May 2015 primary producers will be able to immediately deduct capital expenditure on fencing and water facilities (currently 30 years and 3 years respectively) and write off fodder storage assets over 3 years (currently 50 years). See Primary producers. A full write-off for fodder storage takes effect from 19 August 2018. See further under Primary Producers heading below.

Enabling legislation giving effect to these measures has now been passed by the Federal parliament, see Small Business concessions.

$6,500 Instant Asset write-offs cease 31 December 2013

instant-asset-writeoff-repeal-The $6,500 (and related $5,000 motor vehicle) Small Business asset write-off concessions were removed with effect from 1 January 2014 under the Mining Tax repeal legislation.

Small Business write-off concessions revert back to the $1,000 limits for low pool assets and normal rules for vehicles.

The accelerated depreciation concessions were in place for the period 1 July 2012 to 31 December 2013.

The legislation was approved by parliament on 2 September 2014. See: Mining Tax repeal legislation

See also –  Small Business Entities

 

The Tax Commissioner’s Effective Life Tables

The tables provide an estimated life for assets as determined by the Tax Office. For more about how and when to use these rates, see ATO Depreciation Rates.

Commissioner’s Effective Life Rulings
Tax YearRuling
2018-19TR 2018/4
2017-18TR 2017/2
2016-17TR 2016/1
2015-16TR 2015/2
2014-15TR 2014/4
2013-14TR 2013/4
2012-13TR 2012/2
2011-12TR 2011/2

Self Assessment of Effective Life

You don’t have to use the Commissioner’s estimate when determining the effective life of an asset for depreciation purposes. The alternative is to choose to self assess. 

For information about the self-assessment process, see: Self Assessment of Depreciation rates.

ComputersMotor VehiclesMobile PhoneSoftware

Composite Assets

The Tax Office has issued a draft ruling TR 2017/D1 containing guidance on how and when to treat depreciable components as separate assets, or as a single asset.

The draft ruling sets forth the following factors as the decision basis for determining whether a separate asset is defined:

  • ‘Identifiable’: the depreciating asset performs a separately identifiable function
  • ‘Use’: a depreciating asset will tend to be an item that performs a discrete function
  • ‘Degree of integration’: the depreciating asset will tend to have a high degree of physical integration
  • ‘Effect of attachment’: the item, when attached to another asset having its own independent function, varies the performance of that asset.
  • ‘System’: a depreciating asset will tend to be the multiple components that are purchased as a system to function together as a whole

There are 13 practical examples discussed in the draft ruling, including industrial storage racking, a desktop computer package, mainframe computer system, local area network, aircraft engine and airframe in service on rotation, car GPS, jointly held fibre optic cable communications system, electricity distribution line, replacement electricity pole, upgrade of transformer, rail transport infrastructure, new railway branch line, solar power system and photographic lighting equipment.

Categories of depreciation

Broadly, depreciation is a special deduction for costs which provide a benefit over more than one financial year. Each category of depreciation claim has specific rules and circumstances.

There are categories which allow immediate deductions, small business entity claims, low value pools and the software development pool, and for miners and primary producers.

If your circumstances don’t match (or in some cases if you don’t choose) one of the specific categories, then there are general claims which can be made under more general rules for “depreciating assets” – see below “Depreciation Methods“.

Here’s a brief listing of depreciation rules and categories.

General claims: What are ‘Depreciating Assets’

The term “depreciating assets” is widely defined – this is a general category; but there are some assets which can’t be claimed for depreciation: See Section 40-30 “What a depreciating asset is” and also note Section 40-55 (Use of the “cents per kilometre” car expense deduction method).

See also Draft Taxation Ruling TR 2017/D1 Income tax: composite items and identifying the depreciating asset for the purposes of working out capital allowances

Depreciation Limitation on residential rental properties

Effective from 9 May 2017, Div 40 has been amended to deny depreciation tax deductions for ‘previously used’ depreciating assets used in earning income from residential premises used for residential accommodation. Assets acquired before 9 May 2017 will not be affected. Future deduction claims will be restricted to assets acquired by the taxpayer.

“Previously used” essentially refers to assets that are not first owned and used by the taxpayer. There are exclusions from these measures for certain corporate, trading and other entities. See more details here: Rental property tax deductions

Immediate deductions – non-business taxpayers

There are immediate deductions for depreciating assets costing $300 or less, for non-business taxpayers, which includes investors, landlords and employees. (See Section 40-80(2)

The ATO allows all taxpayers to claim immediate deductions for capital items costing $100 or less, or to use statistical sampling to determine a proportion of total expenditure to be treated as immediately deductible items. For details, see ATO Practice Statement PS LA 2003/8

Low-cost assets – Low Value Pool

Low-cost assets costing less than $1,000 * and assets which have been depreciated under the diminishing value method to less than the Low Value can be optionally bulked into a “Low Value Pool“, with a single arbitrary depreciation write-off schedule. ( see Section 40-425).

Note the more generous small business instant asset write-off applying from 12 May 2015 to 30 June 2019 for assets costing up to $20,000. Small business assets over that value can pooled and depreciated at 15% in the first year and 30% thereafter. See further: concessions for Small Businesses

If the choice is not made, depreciation is determined under the generally applicable effective life rules.

Assets in the Low Value Pool have only one method of depreciation, diminishing value, over an assumed effective life of 4 years.

The taxable use percentage must be estimated, and can’t be varied.

Low Value Pool Depreciation rates (Diminishing Value Method Only)
Low Cost – First Year – year of acquisition (LCA)18.75%
– subsequent years37.5%
Depreciated to less than Low Value and added to the pool (LVA)37.5%

Depreciation of Software – In House Software

The general depreciation rules under Div 40 include “in-house” software as a depreciable asset.

Note: Payments for software in the nature of annual licence fees (such as for tax and accounting software) are generally considered to be business outgoings which are fully deductible when incurred, and are therefore not required to be treated as capital expenditure.

In house software is given a statutory effective life as the basis of depreciation claims:

  • from 1 July 2015 the statutory effective life of in-house software is 5 years
  • (from 13 May 2008) – the effective life is 4 years – a rate of 25% p.a. prime cost; or
  • (before 13 May 2008) – the effective life is 2.5 years  – a rate of 40% p.a. prime cost

“In-house” software by definition includes computer software acquired, developed or commissioned mainly for the taxpayer to use.

Excluded is software which is trading stock or which is deductible elsewhere under the tax rules, or which is in the nature of an annual renewal or subscription which would be fully deductible as a business outgoing.

Subject to eligibility, non-revenue costs of in-house software may alternatively be allocated to a Software Development Pool.

See further

In house software – Software Development Pool

Expenditure on the development of in house software can be allocated to a “Software Development Pool” which provides for a write-off over 4 years – extended to 5 years from 1 July 2015 (see table below).

Excluded: “In-house software” expenditure on acquiring software or a right to use computer software cannot be allocated to the Software Development Pool. (Sec 40-450)

Once a pooling choice is made, all similar expenditure must then be allocated to the pool. (See Section 40-450).

Pool depreciation deductions are calculated under the prime cost method, as follows: (Section 40-455):

In-House Software Development Pool Depreciation (Prime Cost Method Only)
to 30 June 2015From 1 July 2015
First YearNilNil
Second Year40%30%
Third Year40%30%
Fourth Year20%30%
Fifth Year10%

 

Primary Producers and Primary Production

Primary Producers receive specific deductions. Budget 2015: From 12 May 2015 deduction allowances were amended (incorporated in table below):

ItemDepreciationReference(s)
Water facilities33.33% per year for 3 yrs until 12 May 2015;
100% from 7.30pm (AEST) 12 May 2015
Sec 40-515
Sec 40-540
FencingEffective life to 12 May 2015;
100% from 7.30pm (AEST) 12 May 2015 (except if the expenditure relates to a stockyard, pen or portable fence)
Sec 40-551
Fodder storage assetsEffective life to 12 May 2015;
33.33% in each of 3 income years from 7.30pm (AEST) 12 May 2015. With effect from 19 August 2018, fodder storage assets used or installed ready for use by primary producers will be immediately deductible in full.
Sec 40-548
Horticultural plantsImmediate deduction if effective life less than 3 yrs, otherwise formulaSec 40-520
GrapevinesEffective life or Commissioner’s rate
LandcareImmediate deductionSec 40-630
Electricity and telephone10% each year over 10 yearsSec 40-645

 

Carbon Sink Forests

This is a deduction for the direct costs of establishing trees in a carbon sink forest for the dedicated purpose of carbon sequestration – the process by which trees absorb carbon dioxide from the atmosphere. From 1 July 2012 the deduction is based on a write off over 14 years and 105 days starting from the date of the establishment costs. See Carbon sink forests and Subdivision 40J and Guidelines to deduct cost of trees for carbon sequestration

Minerals exploration etc:

Immediate deductions (whether capital expenditure or not) are available for exploration, prospecting, rehabilitation, petroleum rent resource tax and environmental protection. (See section 40-730 and tax ruling TR 2017/1 Income tax: deductions for mining and petroleum exploration expenditure.

See also section 40-80 and draft taxation ruling TD 2018/D2 (for a discussion of what constitutes first use of a mining etc. asset)

Blackhole Expenditure – business-related costs:

Black hole expenses are (otherwise) non-deductible capital expenses associated with a business. Sec 40-880  provides that these expenses be deducted over five years – at the rate of 20% each year.  See also TR 2011/6.

From 1 July 2015 small business start-ups can immediately deduct professional costs associated with starting a business. These expense would otherwise have been treated as black hole expenses and written off over 5 years. Enabling legislation was passed by parliament on 13 August 2015. Small businesses are those with aggregated turnover of less than $2 million. See further: Small Business concessions

 

Other Capital expenditure that is deductible over time

Other business related capital expenditure:

Deductions are provided for certain expenses which would not otherwise be depreciable or claimable. This includes project expenditure for

– such costs being pooled and written off over the life of the project according to formulae in Sections 40-830 and 40-832.

 

 Depreciation Methods

Above are listed various types of depreciation claim categories.  For everything else, Section 40-30 has a general definition of a “depreciating asset” (and importantly lists some exclusions, such as land).

Calculating a tax depreciation claim for an eligible depreciating asset requires:

1. Determine effective life:

  • by a self-assessment of effective life of the asset; or
  • choose the Tax Office estimate of effective life – see the Effective Life tables, updated annually, which are linked at the top of this page

2. choose a calculation method:

The choice is between Diminishing Value and Prime Cost methods of calculating the depreciation for the year (or part year if applicable).

Each of the methods is the arithmetic combination of

  • Base Value or Cost
  • days held
  • effective life (or remaining effective life)

Diminishing Value Method

The diminishing value method tends to bias the depreciation amount in the earlier years.

The formula:

– assets from before 10 May 2006 : Base Value x (Days held / 365) x (150% / Effective life in years) (Section 40-70)

– assets from on or after 10 May 2006: Base Value x (Days held / 365) x (200% / Effective life in years) (Section 40-72)

The Base Value is initially the cost, but this can be modified by later improvements and the forgiveness of commercial debts.

Prime Cost Method

The Prime Cost method allocates the costs evenly over the years of ownership.

The formula:

Cost x (Days held / 365) x (100% / Effective life in years)

The Cost and calculation may be later modified by a recalculation of effective life, later improvements, forgiveness of commercial debts, application of rollover relief, GST and currency adjustments. (Section 40-75 Prime cost method)

Note also that where applicable, luxury cars have an upper depreciation limit.

Determining Effective Life

Except when there is a tax provision specifying otherwise, you generally have the choice of two methods of determining effective life:

  • self assess: i.e. make your own estimate, based on relevant features of the asset and the way it is intended to be used (see Section 40-105); or
  • adopt the Commissioner’s estimate

Exceptions

The choice of self-assessment or Commissioner’s estimate is not available where an asset has been acquired from an associate or when the end-user hasn’t changed, as in a sale and lease-back situation.

In such cases, generally the same depreciation method must be continued, or if the previous method cannot be ascertained, then the Commissioner’s estimate of effective life schedule is required to be used. (See Section 40-95)

Proposed Amendment to Section 40-95 – effective life

The Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 orignally contained an amendment to section 40-95(7) to enable a self-assessment of effective life for amortisation of certain intangible assets (for assets held after 30 June 2016) rather than the existing statutory effective life currently specified.

[Update: Dec 2018] A government-agreed amendment to the Bill specifically excludes this measure. As a result, the Bill will not allow taxpayers to choose to self-assess the effective life of certain intangible depreciating assets. (The Bill also contains unrelated measures).

The intangible assets to which this choice would have applied were:

  • a standard patent
  • an innovation patent
  • a petty patent
  • a registered design
  • a copyright (except copyright in film)
  • a licence (except one relating to a copyright or in house software)
  • a licence relating to a copyright (except copyright in a film)
  • in house software
  • a spectrum licence
  • a datacasting transmitter licence
  • a telecommunications site access right

Statutory Caps on Effective Life

Certain transport assets which have an effective life fixed by law.

Caps on Effective Life

Certain assets have a cap on effective life. When shorter than the Commissioner’s determined effective life, and when the Commissioner’s Effective Life determination for effective life is selected, the capped effective life must be used when available. For rates and assets affected – see Capped Effective Life.

Commissioner of Taxation’s Effective Life Schedules

If choosing or required to use the Commissioner’s estimate of useful life you will need to ensure that the schedule chosen is applicable to the year the asset was acquired.

Year-by-year links to Effective Life Rulings can be found here.

Small Business Entities

You are a small business if you carry on a business and your aggregated business turnover is less than $2 million ($10 million from 1 July 2016) (ATO guide here)

Eligible small businesses can use simplified rules for claiming depreciation, and other concessions, including:

  • The existing immediate deduction for most depreciating “low cost assets” costing less than $1,000 or up to $1,000 of second element costs is superseded by the above $20,000 regime for the period of its application.
  • For the period 1 July 2012 to 31 December 2013, there was a $6,500 instant asset threshold, with special rules for motor vehicles. Under the instant asset write-off provisions, the immediate deductions increase to $6,500 or $5,000 for motor vehicles costing more than $6,500. Asset costs in excess of these amounts may be claimed 15% in the first year and 30% in subsequent years. (Note the termination of this concession from 1 January 2014).
  • from 1 July 2012 pool all assets for deduction at the rate of 30% per annum on a diminishing value basis (15% for first year assets)
  • up to 1 July 2012, separately pool assets with an effective life of 25 years or more for deduction at the rate of 5% per annum on a diminishing value basis (2.5% for first year assets)
  • simplified adjustments for business use percentage, and adjustments on disposal

Further on this see: ATO Simplified Rules

See also:

.

This page was last modified 2018-11-28