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 Expenditure
- Carbon Sink Forests
- Coronavirus response measures
- Environmental Protection
- Immediate deductions non-business taxpayers
- Instant asset write-offs
- Temporary Full Expensing references
- Intangible assets
- Low Cost Assets Low Value Pool
- Minerals exploration etc
- Other capital expenditure
- Primary Producers
- Small Business Depreciation
- Small Business Entities
- Software Development Pool
- Software depreciation
- Composite assets ruling
- Determining effective life (Self Assessment)
- Depreciation methods
- Depreciation of rental properties
- Effective Life Tables
- Self assessment of effective life
- Statutory caps on effective life
- Temporary Full Expensing information references
- Further info on depreciation
[Update 11 May 2021] The Government has announced as part of Budget 2021 measures that the availability of full expensing will be extended by a further year until 30 June 2023. (Budget Paper No. 2 page 29).
Update Oct 2020: Budget 2020 expansion of the instant asset deduction rules.
- Instant asset write off allowances – Temporary Full Expensing – for businesses enlarged and extended from 7:30pm (AEDT) on 6 October 2020 until 30 June 2022 (to be extended to 30 June 2023), businesses with turnover up to $5 billion can deduct 100% of eligible depreciable assets of any value (including improvements to existing assets) in the year of installation. See Explanatory Memorandum and Law Companion Ruling LCR 2021/D1 Temporary full expensing
- These measures are to be further extended to businesses with an aggregated turnover of more than $5 billion due to the income of an overseas parent or associate provided they have invested more than $100 million in tangible depreciating assets in the period 2016‑17 to 2018‑19. (See media release 23 Nov 2020)
When assets decline in value, that represents an economic loss. ATO depreciation is all about recognising that loss – claiming depreciation – for income tax purposes.
Broadly, depreciation is a special deduction for the cost of assets which provide a benefit to an income-earning entity over more than one financial year.
There are general rules which apply under the uniform capital allowance system, provided by rules set out in the Income Tax Assessment Act 1997.
Most claims for depreciation initially fall under Divisions 40 or 43 of the Act.
The Division 40 net is cast widely, covering the majority of assets used to earn income.
A depreciating asset is widely defined to be “an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used “.
This definition is subject to exceptions such as land, trading stock and a number of others. (Sec 40-30)
The scheme of Division 40 is to allow deductions for the decline in value of income-earning assets over time, based on their effective life.
There are a number of exclusions to Division 40 as well as special allowances that do not explicitly follow the effective life calculation basis.
Significantly, Subdivision 328-D is carved out of Division 40. This subdivision provides a simplified basis of depreciation claims and asset accounting via a pooling method, and is available to small business entities.
Division 43 describes a system of deductions for expenditure on income producing buildings and other ‘capital works’.
[Update 11 May 2021] The Government has announced as part of Budget 2021 measures that the availability of full expensing will be extended by a further year until 30 June 2023. (Budget Paper No. 2 page 29)
Temporary Full Expensing information references
- Law Companion Ruling LCR 2021/3 Temporary full expensing
- How to claim temporary full expensing – ATO
- Temporary full expensing of depreciating assets – PWC
- Temporary full expensing of depreciating assets – Tax Banter
Summary of Depreciation Incentives
Outright deductions for the costs of assets acquired are available to small businesses. The current scheme commenced in 2011, and has been amended a number of times since then.
The main criterion for classification is the turnover test, which has been increased since its inception, and more recently expanded to include so-called medium businesses.
Currently the (temporary) business turnover ceiling for Instant Asset Deduction claim purposes is $5 billion.
The base amount of instant asset deduction when it commenced was $1,000. Over the years since then it has been increased to $6,500, $20,000, $25,000 and $30,000. An instant asset deduction limit of $150,000 was implemented from 12 March 2020 with the Coronavirus measures, and subsequently (from 6 October 2020) extended to 100% (i.e. full expensing) until 30 June 2022 (extended to 30 June 2023) for businesses with turnover up to $5 billion.
A Bill currently before parliament amends the income tax law to extend the temporary full expensing regime by (a further) 12 months, until 30 June 2023.
For progress of legislation, see Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2021.
Press release here.
Each increase to the limit has been specified for a temporary period, with $1,000 amount being the fallback amount if the higher valued concession is not renewed.
The instant asset deduction is applicable on an asset-by-asset basis, and the specific deduction amount applicable will depend on the date of purchase (and the usual installed ready for use requirements). Assets which cost more than the applicable limit would need to be depreciated.
[12 March 2020] Covid-19 Stimulus: Included in a package of Coronavirus stimulus measures were measures to apply from 12 March 2020:
- an expansion of the instant asset claim allowance from $30,000 to $150,000 for the period from 12 March 2020 until 30 June 2020 and to include businesses with business turnover of up to $500 million (previously $50 million). On 9 June 2020 the Treasurer announced that the concession will be available for a further 6 months until 31 December 2020.
- an (alternative) accelerated depreciation for businesses with a turnover up to $500 million until 30 June 2021 to allow an additional 50% of the asset cost as a deduction in the year of purchase; or 57.5% as a small business using the simplified depreciation small business pool.
The instant asset provisions apply to new and second hand assets. The accelerated depreciation provisions apply only to new assets.
The instant asset claim cannot be used in conjunction with an accelerated depreciation claim.
The usual private use exclusions apply, as well as the car depreciation cost limit.
[2 April 2019] Small businesses: The $20,000 limit for accelerated small business depreciation claims has been increased to $30,000 on an asset-by-asset basis and extended until 30 June 2020 under proposals announced in January 2019 and expanded upon in the Budget 2019 announcements. The Treasury Laws Amendment (Increasing and Extending the Instant Asset Write-Off) Bill 2019 has been approved by the parliament.
Budget 2019: Announced in the Budget – from 7:30 PM (AEDT) on 2 April 2019 (Budget night) until 30 June 2020:
- The small business (turnover up to $10 million) write-off limit is increased from $25,000 to $30,000, applied on a per asset basis. This applies until 11 March 2020.
- Medium sized businesses (turnover from $10 million to $50 million) will now also have access to the instant asset write off in respect of assets acquired from Budget night to 30 June 2020.
- (As before) the small business pooling (simplified depreciation) rules and suspension of the lockout rules continue until 30 June 2020.
[update Feb 2019] The availability of the instant asset immediate deduction is to be extended to 30 June 2020, with the ceiling lifted to $25,000 from 29 January 2019. See Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019
[update 8 May 2018] 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.
Relatively few assets are not eligible (such as horticultural plants and in-house software).
[update 3 May 2016] 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 along with other small business concessions (excluding CGT, for which the turnover threshold remains at $2 million).
The amending legislation is here: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
[update 12 May 2015] 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):
1 July 201612 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 also Small Business concessions.
The $6,500 Instant Asset Write-off Scheme
[update 2 Sept 2014] $6,500 Instant Asset write-offs to end 31 December 2013
The $6,500 (and related $5,000 motor vehicle) Small Business asset write-off concessions are 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 removal legislation was approved by parliament on 2 September 2014. See: Mining Tax repeal legislation
[Period 2012-13] 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), with simplified adjustments for business use percentage, and adjustments on disposal.
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)
See also: ATO Simplified depreciation
The tables provide an estimated life for assets as determined by the Tax Office. They provide a ‘safe harbour’ estimate of effective life as a default alternative to self assessment. For more about how and when to use these rates see ATO Depreciation Rates.
Commissioner’s Effective Life Rulings
|2021-22||TR 2021/3 – (html version)|
Apart from exceptions, in general 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.
Commissioner’s estimated depreciation rates for the following common items:
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。
They include 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.
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
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)). For an expanded explanation and examples, see Capital allowances – $300 immediate deduction tests.
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 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).
If the choice is not made, depreciation is determined under the generally applicable effective life basis.
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 years||37.5%|
|Depreciated to less than Low|
Value and added to the pool (LVA)
See also: concessions for Small Businesses
The general depreciation rules under Div 40 include “in-house” software as a depreciable asset.
Note: Common payments for software which are 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, and depreciation provisions are not appliable.
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
[Update May 6, 2021] The government intends to amend the law to allow the self-assessment of effective life of patents, registered designs, copyrights and in-house software for tax purposes. This means that deductions may be brought forward if the self-assessed effective life is shorter than the statutory life, and will be consistent with the treatment of tangible assets. See announcement and Budget Papers No.2 pages 14-15
“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.
- Guide to Depreciating Assets
- Taxation Ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website
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 2015||From 1 July 2015|
Primary Producers receive specific deductions.
Plants with effective life of 3 or more years:
|3 to less than 5||40%||2 yrs 183 days|
|5 to less than 6⅔||27%||3 yrs 257 days|
|6⅔ to less than 10||20%||5 years|
|10 to less than 13||17%||5 yrs 323 days|
|13 to less than 30||13%||7 yrs 253 days|
|30 or more years||7%||14 yrs 105 days|
Depreciation: Effective life; or
Commissioner’s rate: dried grapes – 15 years; table grapes – 15 years, wine grapes – 20 years; or
Horticultural plant (see above table) rate of 13% over maximum 7 years 253 days.
Capital costs of acquiring trees Sec 70-120
A deduction (100%) allowed for the cost of trees sold, which were acquired as part of a land acquisition or as a right to fell. Carbon sink forest deductions amounts are specifically excluded.
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 (7% per year) starting from the date of the establishment costs.
- Claiming a deduction for carbon sink forest expenses
- Subdivision 40J
- Guidelines to deduct cost of trees for carbon sequestration
Immediate deductions (whether capital expenditure or not) are available for exploration, prospecting, rehabilitation, petroleum rent resource tax and environmental protection.
Section 40-755 provides a deduction for expenditure which has the sole or dominant purpose of carrying on ‘environmental protection activities’.
Environmental protection activities are those related to a taxpayer’s income-earning activities and include preventing, fighting or remedying pollution and dealing with waste.
Black hole expenses are capital business-related expenses, which but for Sec 40-880 would be non-deductible. This can include startup and wind-up expenses, and applies from 1 July 2005.
Sec 40-880 provides that these expenses be deducted over five years – at the rate of 20% each year.
From 1 July 2015 small or medium (from 1 July 2020) business start-ups can immediately deduct professional costs associated with starting a business. (Sec 40-880 (2A)). These expenses 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 below the qualifying threshold.
Tax ruling TR 2011/6 sets out the Tax Office’s view of the operation of the black hole provisions and contains 40 examples.
Other business related capital expenditure:
Deductions are provided for certain expenses which would not otherwise be depreciable or claimable. This includes project expenditure for
Section 40-30 has a general definition of a “depreciating asset” (and 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.
– 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.
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
- 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
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
Most intangible assets have an effective life which is specified in the UCA depreciation rules, reproduced below.
[Update May 6, 2021] The government intends to amend the law to allow the self-assessment of effective life of patents, registered designs, copyrights and in-house software for tax purposes. This means that deductions may be brought forward if the self-assessed effective life is shorter than the statutory life, consistent with the treatment of tangible assets.
Statutory effective life of intangible assets
|Asset||Effective life (years)|
|Copyright (except copyright in a film)||The shorter of 25 years or period to end|
|A licence (except one relating to a copyright or in-house software)||Term of license|
|A licence relating to a copyright (except copyright in a film)||The shorter of 25 years or period to end|
|In-house software||2 or 4 (see In-house software)|
|Spectrum licence||Term of license|
|Datacasting transmitter licence||15|
|Telecommunications site access right||Term of the right|
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.
Each financial year the ATO issues an updated depreciation guide which details claimable deductions available for depreciating assets and other capital expenditure.
The latest available publication at the time of writing is the Guide To Depreciating Assets 2021, which refers to the 2020-21 financial year.
- ATO’s depreciation calculator tool
- Depreciation rates
- BMT Online Depreciation Rate Finder
- Other capital expenses
This page was last modified 2021-12-22