Depreciation of Work Related Motor Vehicles

Depreciation of cars for tax purposes can be claimed when used to produce taxable income. Depreciation generally is quite a big subject – read more here: depreciation.

Car depreciation rates and claims for work-related motor vehicles, are normally comparatively simple.

As a work-related expense, depreciation is one of the operating expenses claimable under the One Third of Actual Expenses and the Log Book substantiation methods.

Unlike an operating expense such as fuel, the capital cost of a car is spread over several years, based on an estimate of its useful life. Depreciation, or the ‘decline in value’, is the calculation of the costs to be allocated to each of the years of the vehicle’s use.

Issues to consider when formulating a depreciation claim include:

  • cost base – the definition of ‘cost‘ – what’s included, and the valuation
  • how to determine the useful life; and if choosing the Tax Office estimate, the applicable base year
  • the method of depreciation: diminishing value or prime cost
  • the effect (if any) of the luxury car limit

‘Cost’ generally has its normal meaning, being the amount paid for the vehicle. But if the amount paid wasn’t market value, then a market value may be substituted. Certain expenses are included in the ‘cost’ base for depreciation purposes including stamp duty, delivery charges, and initial repairs or improvements.

Note For Small businesses: check the $20,000 threshold for accelerated small business depreciation claims

Vehicle Depreciation Rate – Commissioner’s Estimate

There is no single vehicle depreciation rate, because the effective life estimate is based on the type of vehicle and the conditions under which it is used. Taxpayers can choose to use the Commissioner’s estimate or to self-assess the effective life.

For the following common types of motor vehicle the current Commissioner’s Estimates of Effective Life for vehicles acquired after 10 May 2006* are:

Vehicle designed to carry
a load
of less than 1 tonne and fewer than 9 passengers
Effective Life
(Years)
Diminishing
Value *
Prime Cost
Generally825%12.5%
Hire & travellers’ cars540%20%
Taxis450%25%

* Assets acquired since 10 May 2006 may use a diminishing value rate equivalent to double the prime cost rate.

Car Depreciation Cost Limit

Updates to the depreciation cost limits are released by the Tax Office once a year.

The depreciable cost of motor vehicle is subject to the Luxury Car Limits, which assumes an upper limit on the cost on which depreciation is calculated. If the vehicle costs more than the limit, depreciation is only calculated on the limit.  The limit is:

See also Car Depreciation Limits

Commercial Vehicles – statutory limits

In general, you can choose either the Commissioner’s estimate of effective life or to self-assess the effective life.

For commercial vehicle depreciation claims since 1 January 2005 using the Commissioner’s determination, the rate adopted must be based on the shorter of the capped effective life and the Commissioner’s effective life.

Asset

ATO’s estimate of effective life (years)

Capped Effective
Life (Years)
Buses with a gross vehicle mass of more than 3.5 tonnes

15

7.5

Garbage compactor trucks (including the compactor)

10

7.5

Light commercial vehicles with a carrying capacity of one tonne or greater and a gross vehicle mass of 3.5 tonnes or less (including utilities, vans, and light trucks)

12

7.5

Minibuses with a gross vehicle mass of 3.5 tonnes or less and seats for 9 or more passengers

12

7.5

Trailers with a gross vehicle mass greater than 4.5 tonnes

15

10

Trucks having a gross vehicle mass greater than 3.5 tonnes (other than a truck that is used in mining operations and that is not of a kind that can be registered to be driven on a public road in the place in which the truck is operated)

15

7.5

Depreciation calculation methods

The deduction for depreciation requires an estimate of how many years the vehicle will last. You can self-assess the useful life based on the specific circumstances of your business and the vehicle concerned, or rely on the Taxation Department estimates as contained in the Commissioner’s Effective Life Tables.

There are basically two choices of calculation method of depreciation of a motor vehicle for tax purposes: Diminishing Value and Prime Cost.

Both calculation methods contain the following elements:

  • cost or base value
  • number of days held
  • effective life, or remaining effective life

Diminishing Value Method

The diminishing value method tends to magnify 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)

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

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)

Note also that where motor vehicles are concerned, luxury cars have an upper depreciation limit.

If you need a hand with these formulae to convert Effective Life in years to a depreciation percentage, or would like to compare methods, we’ve built a simple spreadsheet calculator which does the job. You can get it here.

Commissioner of Taxation’s Effective Life Schedules

If choosing to use the Commissioner’s estimate of useful life (rather than self-assess) you will need to ensure that the schedule chosen is applicable to the year the vehicle was acquired. Links to the current and past year Commissioners Effective Life Tables are here.

The Commissioner’s tables are updated annually. If your asset was acquired in an earlier (or later) period, the Ruling applying for that specific  year should be consulted.

How To Use The Effective Life Tables

The Effective Life tables are divided into Table A and Table B.

Under the Tax Office guidelines, use of the Commissioner’s estimate of Effective Life requires that you first try to identify your specific industry under Table A, and then the particular asset.

If your industry category or asset is not listed under Table A, then proceed to Table B, which is a general list of assets. If the asset type is not listed, then you can’t use the Commissioner’s estimate – you must self-assess the effective life.

The Effective Life tables are released in searchable PDF format – which means that despite being quite a long document of some 200 pages, they are searchable for specific text. For example, if you search for the term “Motor vehicles” in the Effective Life tables, the search results will bring you to the listings in Table B as shown in the image (click to enlarge):

When choosing to use the Commissioner’s estimates, these Table B effective life estimates are used when the Table A industry listings don’t provide coverage.

For your motor vehicle depreciation calculation, the effective life in years number will need to be converted to a percentage rate, according to which depreciation method (Diminishing Value or Prime Cost) is preferred.

Example

*** For example (see image on the left), the current Commissioner’s Estimate of Effective Life for an ordinary passenger car (not being a hire car or taxi) purchased since 10 May 2006 is 8 years. This converts to a depreciation percentage rate of 25% Diminishing Value or 12.5% per annum on a Prime Cost Basis. If you’re unclear on the arithmetic in converting effective life to a percentage rate, this spreadsheet calculator may help.

Small Businesses (< $10 million turnover)

Eligible Small Businesses may choose to access Simplified rules which pools assets with an effective life of less than 25 years to be deductible at the rate of 30% per annum on a diminishing value basis (first-year 15%).

Accelerated depreciation – instant asset write-off

From 1 July 2012 to 31 December 2013 motor vehicles were included in Small Business Entity concessions which provided for an immediate deduction of up to $5,000 with the balance claimed in the general pool at a rate of 15% for the first year, and 30% thereafter. If the cost is more than $5,000 but less than $6,500, the full amount may be claimed up front.

Motor vehicles, including second hand vehicles, are included in the latest Small Business instant asset write-off initiative, which allows an immediate deduction for assets up to a value of $20,000. This concession was initially available from 7.30pm (AEST) 12 May 2015 and is currently extended until 30 June 2019. See Small Business Entity Incentives

For more depreciation information see: ATO Depreciation and also ATO Depreciation Rates and Self Assessment of Depreciation rates

Further information

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This page was last modified 2018-09-13