Tax deductions for depreciating assets and capital expenses

When to claim a deduction

If a depreciating asset is used in gaining your assessable income, generally you can claim deductions for its decline in value over time.

You can apply the general depreciation rules to calculate your deduction for most assets. If you are a small business entity, you can use the simplified depreciation rules.

If you do not use the simplified depreciation rules, you can calculate the decline in value of some low-cost and low-value assets by allocating them to a low-value pool and depreciating them at a set annual rate.

Ensure you keep accurate and complete records of all expenses you claim deductions for.

Depreciating assets

A depreciating asset:

• has a limited life expectancy (effective life)
• can reasonably be expected to decline in value (depreciate) over the time it is used.

Types of depreciating assets

Examples of assets that depreciate:

• machinery (machines and mechanical tools) and equipment, such as EFTPOS machines, welding machines, air purifiers, steam cleaners and laminators
• motor vehicles
• furniture, carpet and curtains
• computers and computer accessories, including keyboards
• landline phones and headsets
• mobile phones, tablets and styluses.

These assets can be ones you either:

• already personally own and bring into your business, or
• purchase in your business to produce assessable income.

For example, if you purchase a device to use a Digital ID, such as myID, and ATO online services while running your business, you can claim deductions for the business portion of those expenses.

For more, see our Guide to depreciating assets 2022.

Types of assets that do not depreciate

Examples of assets that do not depreciate include:

• land
• trading stock items
• most intangible assets (for example, trademarks as they are not intellectual property).

However, certain improvements to land and fixtures (for example fences) on land are depreciating assets.

When depreciation is already included

The amount you claim already includes depreciation if you:

• are a sole trader or eligible partnership, and
• use the cents per kilometre method to claim a deduction for the business expenses of running a car.

You can't claim depreciation of the car again separately.

Temporary tax depreciation incentives

Eligible businesses may be able to claim an immediate or accelerated deduction for the business portion of the cost of an asset that was first used or installed ready for use by you for a taxable purpose on or before 30 June 2024 using one of these temporary tax depreciation incentives:

• temporary full expensing
• instant asset write-off

For a high-level snapshot to help you work out how these incentives may apply, see Interaction of tax depreciation incentives.

Determining the effective life of depreciating assets

The decline in value of a depreciating asset is generally based on the asset's effective life. The effective life is broadly the period the asset can be used by anyone for income-producing purposes.

To determine the effective life of most depreciating assets, you can:

• use the Commissioner's effective life determinations
• make your own estimate.

If the Commissioner's effective life determination does not work for your circumstances, or there isn't one for your asset, you must make your own effective life estimate.

If you use the Commissioner's effective life determinations, they will not be challenged in any audit process. If you estimate the effective life, we may ask you to explain how you worked it out.

Claiming a deduction for decline in value

You can claim a deduction for depreciating assets decline in value each year over the effective life, unless you are eligible to claim a deduction using one of the temporary depreciation incentives.

If you are a small business entity that has elected to use the simplified depreciation rules, depreciating assets you cannot claim an immediate deduction for must be allocated to a small business depreciation pool.

The amount you can claim will generally be less if you:

• own the asset for less than one year
• only partly use the asset for business purposes – for example, if you use it for 60% business purposes and 40% private purposes, you can only claim 60% of its total decline in value
• own the asset for some time before you start the business – work out how much the asset has declined in value before you started using it in your business and then work out the amount you can claim.

There are exceptions to the general depreciation rules, such as those that apply to capital works (for example, building construction costs and building improvements).

For help calculating the deduction from a depreciating asset or claims you are entitled to for capital allowance and capital works purposes, use our Depreciation and capital allowances tool.

Capital works construction expenses

You can claim a deduction over a number of years for construction expenses and other capital works used for producing income, including:

• new buildings or extensions, alterations or improvements to an existing building
• alterations and improvements to a leased building, including shop fit outs and leasehold improvements
• structural improvements such as sealed driveways, fences and retaining walls
• earthworks for environmental protection, such as embankments.

Website expenses

If you create or maintain a website for your business, you can claim the associated expenses as a deduction.

If eligible, you can claim an immediate deduction for the cost of acquiring or developing a website under the temporary tax depreciation incentives. If you are not eligible you claim a decline in value deduction for these costs over time. If you choose to allocate expenditure on your website to a software development pool, the expenses have an effective life of 5 years (if you incur them on or after 1 July 2015).

You can also claim a deduction for some ongoing expenses associated with running and maintaining your website in the year they occur, including:

• domain name registration fees
• server hosting expenses.

Refer to TR 2016/3 Income tax: deductibility of expenditure on a commercial website

Software expenses

You can claim the cost of commercial off-the-shelf software as a deduction either:

• in the year you purchase it – if the software has an effective life of one year or less or you are eligible to claim an immediate deduction using a depreciation incentive
• over several years – if the effective life is more than a year.

If you acquire software under a subscription, you can deduct this fee in the year you incur it.

Special rules apply to in-house software you acquire or develop for your business use.

Other capital expenses

You may be able to claim a tax deduction for expenses related to the cost of setting up or ceasing a business. This is commonly known as black-hole expenditure.

You can only claim a deduction for black-hole expenditure if all the following apply:

• You cannot claim a deduction for the expenses under another provision of the tax law.
• A deduction for the expense is not denied under another provision of the tax law.
• The business is, was or is proposed to be carried on for a taxable purpose.
• You claim a deduction for the cost of setting up or ceasing a business over 5 years If you meet additional criteria, you can claim an immediate deduction for eligible expenditure.

Taxpayers eligible for immediate deduction

If you meet the additional eligibility, you can claim an immediate deduction for eligible cost of setting up a business, rather than over 5 years. The eligible costs are certain professional advice and services and certain payments to Australian Government agencies.

You are eligible for the immediate deduction for these expenses if, in addition to the basic criteria above, you carried on a business in the income year and were either a small business entity or have an aggregated turnover of less than $50 million.

Alternatively, you are eligible for the immediate deduction in an income year if, in addition to the basic criteria above, you are not carrying on a business in the income year and are not connected with, or an affiliate of, an entity that carries on a business that is not a small business entity or has an aggregated turnover of more than $50 million.

You can deduct expenditure you incur for a business that used to be, or is proposed to be, carried on by another entity, such as a company you own, to the extent that:

• the business was, or is proposed to be, carried on for a taxable purpose, and
• the expenditure is in connection with you deriving assessable income from the business and the business that was carried on or is proposed to be carried on.

Professional advice and services

Advice and services from professionals, such as lawyers and accountants, that may be immediately deductible under these rules include:

• advice on a business structure
• setting up legal arrangements or business systems
• advice on business viability (including due diligence if a business is being purchased)
• development of a business plan.

You cannot claim the cost of acquiring assets used in the business under these rules.

Payments to Australian Government agencies

You may also be entitled to an immediate deduction for fees, taxes or charges paid to an Australian Government agency that relate to establishing the business or its operating structure. Examples include the costs associated with creating the entity that may operate the business (such as the fee for creating a company) and costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, the payment of stamp duty). It does not include expenditure relating to taxes of general application such as income tax. 

Capital asset labour costs

Capital asset labour costs (such as salary, wages and other amounts for labour) are those incurred in the construction or creation of profit-generating:

• tangible assets – such as land, plant and property
• intangible assets – such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles).

Unlike other labour costs, which can generally be claimed as an immediate tax deduction because they’re considered revenue in nature, labour costs incurred specifically in the construction or creation of capital assets are considered capital in nature.

This won’t apply to labour costs for employees whose roles or functions might only have an incidental or insignificant role with creating or constructing your capital assets.

If your employees have mixed duties, you’ll need to apportion your deduction between:

• immediately-deductible labour costs – not related to constructing or creating capital assets
• capital asset labour costs – which may instead form part of the cost of a depreciating asset or capital works and be claimed as depreciation or a capital works deduction.

To help you work out the tax treatment of labour costs where the employee performs a mix of functions and practical guidance about what records and information you’ll need to keep, see Taxation Ruling TR 2023/2 Income tax: application of paragraph 8 1(2)(a) of the Income Tax Assessment Act 1997 to labour costs related to the construction or creation of capital assets.