Depreciation rates are based generally on the effective life of an asset unless a write-off rate is prescribed for some other purpose, such as the small business incentives.
All other depreciating assets require a useful life estimate.
How long an asset is considered to last, its “useful life“, determines the rate for deducting part of the cost each year.
There are several ways in which the rate of depreciation for a particular asset might be determined:
- some kinds of assets have a prescribed depreciation rate – a number of those are set out here.
- you make a self-assessment – this your own estimate of effective life based on features of the asset and the way it is used; or
- you use a determination of effective life for which tables are updated and published annually by the Tax Office (see discussion below).
The ATO makes its determination of effective life for different kinds of assets after research into how long it will take for them to wear out according to an assumed usage level. The effective life will naturally depend on the kind of asset, how it is used and the conditions it is subjected to.
The information below can be used to find the effective life (in years) for an asset.
For a depreciation claim, the next step is to convert the effective life to a percentage rate deduction, based one of the two depreciation methods outlined below, or using the effective life conversion spreadsheet which is offered at the foot of this page.
The percentage is applied to the cost, or remaining cost, of an asset to yield a dollar amount which is the depreciation deduction.
If choosing 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.
|Commissioner’s Effective Life Tables|
The applicable Ruling for an asset, is the one covering the period in which the asset was acquired.
How to calculate depreciation: Convert effective life in years to a percentage rate
Having found an asset under the industry listing (Table A) or in Table B, the Effective Life tables provide a single number. That number is the Commissioner’s estimate of effective life in years. That determination in years forms the basis of a depreciation calculation which allocates the asset cost over the years of its useful life.
Based on a useful life measured in years, there are then two possible depreciation calculation methods:
Depreciation calculation method
There’s a choice of two methods: Diminishing Value, and Prime Cost:
Diminishing Value Method
The diminishing value method results in higher depreciation claim amounts in the earlier years of asset ownership.
For assets from on or after 10 May 2006 the formula is:
Base Value x (Days held / 365) x (200% / Effective life in years)
The term ‘Base Value’ is initially cost, but this can be modified by later improvements and the forgiveness of commercial debts. Under the Diminishing Value method, the depreciation for each successive year is calculated on the Base Value reduced by the previous year’s claim amount.
(N.B. For assets before 10 May 2006, 200% in the above formula is substituted by 150%)
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.
Note also that where motor vehicles are concerned, luxury cars have an upper depreciation limit.
- ATO depreciation
- Self-assessment of depreciation
- BMT Online Depreciation Rate Finder
- More tax deductions
- Rental property tax deductions
This page was last modified 2017-11-15