Guide to depreciating assets 2024
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A guide to claiming the decline in value of capital assets used in gaining assessable income, such as a car or machinery.
How to get the guide to depreciating assets
How to download a copy of the guide to depreciating assets.
About the guide to depreciating assets
Find out who should use the guide to depreciating assets 2024.
Deductions for the cost of depreciating assets
Depreciating assets, deductions and uniform capital allowances rules, working out decline in value and effective life.
About uniform capital allowances and steps to follow to work out your deduction.
What is a depreciating asset, second-hand depreciating asset, and what depreciating assets are excluded from UCA.
Who can claim deductions for the decline in value of a depreciating asset?
Find out who can claim deductions for the decline in value of a depreciating asset.
General and specific rules for working out the decline in value of depreciating assets.
Immediate deduction for certain non-business depreciating assets (costing $300 or less)
Find out when you can claim an immediate deduction for the cost of certain non-business depreciating assets.
Effective life of a depreciating asset
Find out about the effective life of depreciating assets (how long it can be used for a taxable purpose).
About the cost of a depreciating asset, limitations or arrangements you need to take into account for decline in value.
What happens if you no longer hold or use a depreciating asset?
Find out what happens if you no longer hold or use a depreciating asset.
About low value pools, when you can allocate depreciating assets and how to work out the decline in value.
About in-house software and claiming a decline in value deduction under UCA.
Depreciating assets and taxation of financial arrangements (TOFA)
When the taxation of financial arrangements rules apply to you and your depreciating assets.
Primary production depreciating assets
Depreciating assets used in primary production and the special rules for working out the decline in value.
Capital expenditure deductible under UCA
When you can claim capital expenditure deductions under uniform capital allowances.
Small business entity concessions
Eligibility for small business entity concessions, simplified depreciation rules and rollover relief.
Certain start-up expenses immediately deductible
When certain start-up expenses are immediately deductible under Section 40-880.
Record keeping for depreciating assets
Records to keep for depreciating assets, low-value pools and rollover relief available under UCA.
Definitions for the most commonly used uniform capital allowances terms.
Worksheets for depreciating assets and low-value pools
Get the worksheets and worksheet guidelines for depreciating assets and low-value pools.
How to get the guide to depreciating assets
How to download a copy of the guide to depreciating assets.
Get the guide to depreciating assets
The Guide to depreciating assets 2024 is available in print, to get a copy of the guide there are 2 ways
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- you can download this guide in portable document format (PDF) select the Print or Download icon under the page heading then select PDF whole topic have a copy sent to you in the post
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- go to Guide to depreciating assets 2024 on our Publications Ordering Service (POS) at iorder.com.au to get a copy.
About the guide to depreciating assets
Find out who should use the guide to depreciating assets 2024.
On this page
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- About depreciating assets
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- Who should use this guide?
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- What's new in the guide to depreciating assets
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- Small business entities
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- Unfamiliar terms
As a general rule, you can claim deductions for expenses you incurred in gaining or producing your income (for example, in carrying on a business) but some expenditure, such as the cost of acquiring capital assets, is generally not deductible. However, you may be able to claim a deduction for the decline in value of the cost of capital assets used in gaining assessable income.
Guide to depreciating assets 2024 explains:
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- how to work out the decline in value of your depreciating assets
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- what happens when you dispose of or stop using a depreciating asset, and
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- the deductions you may be able to claim under uniform capital allowances (UCA) for capital expenditure other than on depreciating assets.
In this guide, the words 'ignoring any GST impact' mean that if you are not entitled to claim an input tax credit for GST for a depreciating asset that you hold, then the cost of the depreciating asset includes any GST.
Use this guide if you bought capital assets to use in gaining or producing your assessable income and you would like to claim a deduction for the assets' decline in value. Also use this guide if you incurred other capital expenditure and want to know whether you can claim a deduction for the expenditure.
What's new in the guide to depreciating assets
Find out what's new for in the guide to depreciating assets.
Small business energy incentive
The Small business energy incentive provides businesses with an aggregated annual turnover of less than $50 million with access to a bonus deduction equal to 20% of the cost of eligible assets and improvements to existing assets that support more efficient energy use.
This is a temporary measure to support small businesses to improve their energy efficiency and save on energy bills. The bonus deduction applies to the cost of eligible assets and improvements up to a maximum amount of $100,000 with the maximum bonus deduction being $20,000.
To claim the bonus deduction for the small business energy incentive, see the instructions for completing your entities tax return.
At the time of publishing, this measure is not yet law. For more information, seeSmall business energy incentive.
Small business – $20,000 instant asset write-off
The Small business support – instant asset write-off provides a temporary increase to the instant asset write-off threshold to support business entities (with an aggregated annual turnover of less than $10 million).
Eligible small business entities can immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose between 1 July 2023 and 30 June 2024.
The $20,000 threshold will apply on a per asset basis, so small businesses can instantly write off multiple assets. Small businesses can also immediately deduct an eligible amount included in the second element of a depreciating asset's cost. To check if you're a small business entity, see Calculate your aggregated turnover.
The 5-year 'lock out' rule continues to be suspended until 30 June 2024. This rule prevented small businesses from re-entering the simplified depreciation regime if they opted out.
At the time of publishing, this measure is not yet law. For more information, see Small business support – $20,000 instant asset write-off.
Effective life determinations
We're working on updating how we publish effective life determinations.
The effective life determinations may be used to work out the decline in value of a depreciating asset. When claiming deductions in your tax return, you can choose to self-assess the effective life of a depreciating asset or rely on our determination of the effective life.
We publish our effective life determinations Capital allowances: effective life &$150; rulings, law and objections.
Small business entities
Small business entities may choose to use simplified depreciation rules. For more information, see Small business entity concessions.
Publications and services
When we refer to publications and services or our website in this guide, we will provide a link to where you access and read it online.
Unfamiliar terms
Unfamiliar terms are shown in bold when first used in this guide. For an explanation of these unfamiliar terms, see Definitions.
Deductions for the cost of depreciating assets
Depreciating assets, deductions and uniform capital allowances rules, working out decline in value and effective life.
On this page
Under income tax law, you are allowed to claim certain deductions for expenditure incurred in gaining or producing assessable income, for example, in carrying on a business. Some expenditure, such as the cost of acquiring capital assets, is generally not deductible. Generally, the value of a capital asset that provides a benefit over a number of years declines over its effective life. Because of this, the cost of capital assets used in gaining assessable income can be written off over a period of time as tax deductions.
Before 1 July 2001, the cost of plant (for example, cars and machinery) and software was written off as depreciation deductions. See Depreciation and capital allowances tool if you need help calculating your depreciation deduction for plant and software purchased before 1 July 2001.
Since 1 July 2001, uniform capital allowances (UCA) apply to most depreciating assets, including plant. Under UCA, deductions for the cost of a depreciating asset are based on the decline in value of the asset.
Simplifying tax obligations for business
The Practice Statement Law Administration PS LA 2003/8 Practical approaches to low-cost business expenses, provides guidance on 2 straightforward methods that you can use, if you are carrying on a business, to help determine whether you treat expenditure incurred in acquiring certain low-cost tangible assets as revenue expenditure or capital expenditure.
Subject to certain qualifications, the 2 methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost tangible assets. The threshold rule allows an immediate deduction for qualifying low-cost tangible assets costing $100 or less, including any GST. If you have a low-value pool (see Low-value pools), the sampling rule allows you to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost tangible assets that is revenue expenditure.
We will accept a deduction for expenditure incurred on qualifying low-cost tangible assets calculated in accordance with this practice statement.
Uniform capital allowances
About uniform capital allowances and steps to follow to work out your deduction.
On this page
Uniform capital allowances rules
Uniform capital allowances (UCA) provide a set of general rules that apply across a variety of depreciating assets and certain other capital expenditure. UCA do this by consolidating a range of former capital allowance regimes. UCA replace provisions relating to:
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- plant
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- software
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- mining and quarrying
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- intellectual property
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- forestry roads and timber mill buildings
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- spectrum licences.
You use these rules to work out deductions for the cost of your depreciating assets, including those acquired before 1 July 2001. You can generally deduct an amount for the decline in value of a depreciating asset you held to the extent that you used it for a taxable purpose.
However, an eligible small business entity may choose to work out deductions for their depreciating assets using the simplified depreciation rules; see Small business entity concessions.
Steps to work out your deduction
Under UCA, there are a number of steps to work out your deduction for the decline in value of a depreciating asset.
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- Is your asset a depreciating asset covered by UCA?
- See What is a depreciating asset?
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- Do you hold the depreciating asset?
- See Who can claim deductions for the decline in value of a depreciating asset?
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- Has the depreciating asset started to decline in value?
- See When does a depreciating asset start to decline in value?
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- What method will you use to work out decline in value?
- See Methods of working out decline in value
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- What is the effective life of the depreciating asset?
- See Effective life of a depreciating asset
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- What is the cost of your depreciating asset?
- See Cost of a depreciating asset
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- Must you reduce your deduction for any use for a non-taxable purpose?
- See Decline in value of a depreciating asset used for a non-taxable purpose
Some of these steps don't apply:
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- if you choose to allocate an asset to a pool
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- if you can claim an immediate deduction for the asset
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- to certain primary production assets
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- to some assets used in rural businesses.
See Working out decline in value.
What is a depreciating asset?
What is a depreciating asset, second-hand depreciating asset, and what depreciating assets are excluded from UCA.
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- Depreciating assets
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- Second-hand depreciating assets in residential rental properties
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- Depreciating assets excluded from UCA
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.
Land and items of trading stock are specifically excluded from the definition of depreciating asset.
Most intangible assets are also excluded from the definition of depreciating asset. Only the following intangible assets, if they are not trading stock, are specifically included as depreciating assets:
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- in-house software; see In-house software
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- certain items of intellectual property (patents, registered designs, copyrights and licences of these)
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- mining, quarrying or prospecting rights and information
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- certain indefeasible rights to use a telecommunications cable system
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- certain telecommunications site access rights, and
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- spectrum licences.
Improvements to land or fixtures on land (for example, windmills and fences) may be depreciating assets and are treated as separate from the land, regardless of whether they can be removed or not.
In most cases, it will be clear whether or not something is a depreciating asset. If you are not sure, contact us or your recognised tax adviser.
Second-hand depreciating assets in residential rental properties
You cannot claim a deduction for the decline in value of certain second-hand depreciating assets in your residential rental property unless you are using the property in carrying on a business, including the business of letting rental properties, or you are excluded entity.
These rules generally apply to depreciating assets:
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- for which you entered into a contract to acquire, or which you otherwise acquired, at or after 7:30 pm on 9 May 2017, or
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- which you used, or had installed ready for use, for any private purpose in 2016–17 or earlier, and for which you were not entitled to a deduction for a decline in value in 2016–17.
Residential rental property is residential premises you use to provide residential accommodation for the purpose of producing assessable income.
For more information on the limit on the deductions for decline in value of second-hand depreciating assets in your residential rental property, including on how the new rules apply to the assets allocated to low-value pools, see Rental properties 2024.
Depreciating assets excluded from UCA
Deductions for the decline in value of some depreciating assets are not worked out under UCA. These depreciating assets are:
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- depreciating assets that are capital works, for example, buildings and structural improvements for which deductions
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- are available under the separate provisions for capital works
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- would be available if the expenditure had been incurred, or the capital works had been started, after a particular date
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- would be available if the capital works were used in a deductible way in the income year
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- cars, where you use the cents per kilometre method for calculating car expenses; this method takes the decline in value into account in its calculations
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- work-related items (such as laptop computers, personal digital assistants, computer software, protective clothing, briefcases and tools of trade), ordinarily eligible for a depreciation deduction under UCA, will not be eligible if
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- the item was provided to you by your employer, or some or all of the cost of the item was paid for or reimbursed by your employer, and
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- the provision, payment or reimbursement was exempt from fringe benefits tax
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- depreciating assets for which deductions were available under the specific film provisions.
Who can claim deductions for the decline in value of a depreciating asset?
Find out who can claim deductions for the decline in value of a depreciating asset.
On this page
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- Depreciating asset holder
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- Leased luxury cars
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- Depreciating assets subject to hire purchase agreements
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- Leased depreciating assets fixed to land
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- Depreciating assets which improve or are fixed to leased land
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- Partnership assets
Only the holder of a depreciating asset can claim a deduction for its decline in value.
In most cases, the legal owner of a depreciating asset will be its holder.
There may be more than one holder of a depreciating asset, for example, joint legal owners of a depreciating asset are all holders of that asset. Each person's interest in the asset is treated as a depreciating asset. Each person works out their deduction for decline in value based on their interest in the asset (for example, based on the cost of the interest to them, not the cost of the asset itself) and according to their use of the asset.
In certain circumstances, the holder is not the legal owner. Some of these cases are discussed below.
If you are not sure whether you are the holder of a depreciating asset, contact us or your recognised tax adviser.
A leased car, either new or second-hand, is generally a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease is granted. The car limit for 2023–24 is $68,108; see Car limit.
For income tax purposes, a luxury car lease (other than a genuine short-term hire arrangement) is treated as a notional sale and loan transaction.
The first element of cost of the car to the lessee and the amount lent by the lessor to the lessee to buy the car is taken to be the car's market value at the start time of the lease. For more information on the first element of cost, see Cost of a depreciating asset.
The actual lease payments made by the lessee are divided into notional principal and finance charge components. That part of the finance charge component applicable to the particular period may be deductible to the lessee.
The lessee is generally treated as the holder of the luxury car and is entitled to claim a deduction for the decline in value of the car. For the purpose of calculating the deduction, the first element of cost of the car is limited to the car limit for the year in which the lease is granted; see Assets and exclusions – car limit.
Any deduction must be reduced to reflect any use of the car other than for a taxable purpose, such as private use. See Decline in value of a depreciating asset used for a non-taxable purpose.
If the lessee does not actually acquire the car from the lessor when the lease terminates or ends, the lessee is treated as if they sold the car to the lessor. The lessee will need to work out any assessable or deductible balancing adjustment amount; see What happens if you no longer hold or use a depreciating asset?
Depreciating assets subject to hire purchase agreements
For income tax purposes, certain hire purchase and instalment sale agreements are treated as a notional sale of goods by the financier (or hire purchase company) to the hirer, financed by a notional loan from the financier to the hirer. The hirer is in these circumstances treated as the notional buyer and owner under the arrangement. The financier is treated as the notional seller.
Generally, the cost or value of the goods stated in the hire purchase agreement or the arm's length value is taken to be the cost of the goods to the hirer and the amount lent by the financier to the hirer to buy the goods.
The hire purchase payments made by the hirer are separated into notional loan principal and notional interest under a formula set out in Division 240 of the ITAA 1997. The notional interest may be deductible to the hirer to the extent that the asset is used to produce assessable income.
Under UCA, if the goods are depreciating assets, the hirer is regarded as the holder provided it is reasonably likely that they will actually acquire the asset.
If these conditions are met, the hirer is able to claim a deduction for decline in value to the extent that the assets are used for a taxable purpose, such as for producing assessable income.
If the hirer actually acquires the goods under the agreement, the hirer continues to be treated as the holder. Actual transfer of legal title to the goods from the financier to the hirer is not treated as a disposal or acquisition.
On the other hand, if the hirer does not actually acquire the goods under the arrangement, the goods are treated as being sold back to the financier at their market value at that time. The hirer will need to work out any assessable or deductible balancing adjustment amount; see What happens if you no longer hold or use a depreciating asset?
The notional loan amount under a hire purchase agreement is treated as a limited recourse debt; see Limited recourse debt arrangements.
Leased depreciating assets fixed to land
If you are the lessee of a depreciating asset and it is fixed to your land, under property law you become the legal owner of the asset. As the legal owner you are taken to hold the asset. However, an asset may have more than one holder. Despite the fact that the leased asset is fixed to your land, if the lessor of the asset (often a bank or finance company) has a right to recover it, then they too are taken to hold the asset as long as they have that right to recover it. You and the lessor, each being a holder of the depreciating asset, would calculate the decline in value of the asset based on the cost that each of you incur.
Example: holder of leased asset fixed to land
Jo owns a parcel of land. A finance company leases some machinery to Jo who pays the cost of fixing it to her land. Under the lease agreement, the finance company has a right to recover the machinery if Jo defaults on her lease payments.
The finance company holds the machinery as it has a right to remove the machinery from the land. The finance company is entitled to deductions for the decline in value of the machinery, based on the cost of the machinery to the finance company.
However, Jo also holds the machinery as it is attached to her land. She is entitled to a deduction for the decline in value of it based on the cost to her of holding the machinery. This cost would not include her lease payments but would include the cost of installing the machinery. For more information about what amounts form part of the cost of a depreciating asset, see Cost of a depreciating asset.
Depreciating assets which improve or are fixed to leased land
If a depreciating asset is fixed to leased land and the lessee has a right to remove it, the lessee is the holder while the right to remove the asset exists.
Example: holder of depreciating asset fixed to leased land
Jo leases land from Bill, who owns the land. Jo purchases some machinery and fixes it to the land. Under property law, the machinery is treated as part of the land, so Bill is its legal owner.
However, under the terms of her lease, Jo can remove the machinery from the land at any time. Because she has acquired and fixed the machinery to the land and has a right to remove it, Jo is the holder of the machinery for the period during which the right to remove it exists.
If a lessee or owner of certain other rights over land (for example, an easement) improves the land with a depreciating asset, that person is the holder of the asset if the asset is for their own use, even though they have no right to remove it from the land. They remain the holder while the lease or right exists.
Example: holder of depreciating asset that improves leased land
Jo leases land from Bill to use for farming. Jo installs an irrigation system on the land which is an improvement to the land. While Bill is the legal owner under property law as the irrigation system is part of his land, Jo is the holder of the irrigation system. Even though she has no right to remove the irrigation system under her contract with Bill, Jo may deduct amounts for its decline in value for the term of the lease because:
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- she improved the land, and
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- the improvement is for her use.
The partnership (not the partners or any particular partner) is taken to be the holder of a partnership asset, regardless of its ownership. A partnership asset is an asset held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.
Working out decline in value
General and specific rules for working out the decline in value of depreciating assets.
On this page
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- UCA general rules for decline in value
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- When does a depreciating asset start to decline in value?
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- Depreciation incentives
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- Methods of working out decline in value
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- Decline in value of a depreciating asset used for a non-taxable purpose
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- Decline in value of leisure facilities
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- Decline in value of boats
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- Depreciating asset acquired from an associate
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- Sale and leaseback arrangements
UCA general rules for decline in value
UCA contain general rules for working out the decline in value of a depreciating asset, and these rules are covered in this part of the guide.
The general rules do n'ot apply to some depreciating assets. UCA provide specific rules for working out deductions for the assets listed below:
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- certain depreciating assets that cost $300 or less and that are used mainly to produce non-business assessable income; see Immediate deduction for certain non-business depreciating assets (costing $300 or less)
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- certain depreciating assets that cost or are written down to less than $1,000; see Low-value pools
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- in-house software for which expenditure has been allocated to a software development pool; see Software development pools
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- depreciating assets used in exploration or prospecting; see Mining and quarrying, and minerals transport
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- water facilities, fencing assets, fodder storage assets and horticultural plants (including grapevines); see Primary production depreciating assets
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- certain depreciating assets of primary producers, other landholders and rural land irrigation water providers used in landcare operations; see Landcare operations
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- certain depreciating assets of primary producers and other landholders used for electricity connections or phone lines; see Electricity connections and phone lines
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- trees in a carbon sink forest; see Carbon sink forests.
There are also specific rules for working out notional deductions for depreciating assets used in carrying on research and development activities; see Research and development tax incentive schedule instructions 2024.
When does a depreciating asset start to decline in value?
The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose. This is known as a depreciating asset's start time.
Although an asset is treated as declining in value from its start time, a deduction for its decline in value is only allowable to the extent it is used for a taxable purpose; see Definitions.
If you initially use a depreciating asset for a non-taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset's decline in value from its start time, including the years you used it for a private purpose. You can then work out your deductions for the decline in value of the asset for the years you used it for a taxable purpose; see Decline in value of a depreciating asset used for a non-taxable purpose.
In 2020, the government introduced temporary tax incentives to help Australian businesses withstand the impacts of COVID-19. One of these temporary tax incentives was temporary full expensing. Temporary full expensing ended on 30 June 2023.
For information on which of the depreciation incentives may apply to an asset in earlier income years, see Interaction of tax depreciation incentives.
Methods of working out decline in value
You generally have the choice of 2 methods to work out the decline in value of a depreciating asset. These are:
Both these methods are based on a depreciating asset's effective life. The rules for working out an asset's effective life are explained in Effective life of a depreciating asset.
You can generally choose to use either method for each depreciating asset you hold. However, once you have chosen a method for a particular asset, you cannot change to the other method for that asset.
The Depreciation and capital allowances tool will help you with the choice and the calculations.
If you are not carrying on a business, you may be able to claim an immediate deduction for certain depreciating assets that cost $300 or less; see Immediate deduction for certain non-business depreciating assets (costing $300 or less).
In other cases, you don't have a choice of which method you use to work out the decline in value. These cases are:
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- If you acquire intangible depreciating assets such as in-house software, certain items of intellectual property, spectrum licences and telecommunications site access rights, you must use the prime cost method.
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- If you acquire a depreciating asset from an associate who has deducted or can deduct amounts for the decline in value of the asset, see Depreciating asset acquired from an associate.
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- If you acquire a depreciating asset, but the user of the asset does not change or is an associate of the former user, for example, under sale and leaseback arrangements, see Sale and leaseback arrangements.
If there has been rollover relief, see Rollover relief.
If the asset has been allocated to a low-value pool or software development pool, the decline in value is calculated at a statutory rate, see Software development pools and Low-value pools.
By working out the decline in value you determine the adjustable value of a depreciating asset. A depreciating asset's adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time. See Cost of a depreciating asset for information on first and second elements of cost. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.
You calculate the decline in value and adjustable value of a depreciating asset from the asset's start time independently of your use of the depreciating asset for a taxable purpose. However, your deduction for the decline in value is reduced by the extent that your use of the asset is for a non-taxable purpose; see Decline in value of a depreciating asset used for a non-taxable purpose. Your deduction may also be reduced if the depreciating asset is a leisure facility or boat even though the asset is used, or installed ready for use, for a taxable purpose; see Decline in value of leisure facilities and Decline in value of boats.
The diminishing value method:
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- assumes the decline in value each income year is a constant percentage of the base value each year for the effective life of the asset, and
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- produces a progressively smaller decline in the item's value over time.
Did you hold the depreciating asset before 10 May 2006?
Yes: For depreciating assets you held before 10 May 2006, the formula for the decline in value is:
base value
× (
days held
÷ 365) × (150% ÷ asset's effective life).
Use this formula for any asset you held before 10 May 2006, even if you disposed of it and reacquired it on or after 10 May 2006.
No: For depreciating assets you started to hold on or after 10 May 2006, the formula for the decline in value is:
base value
× (
days held
÷ 365) × (200% ÷ asset's effective life).
The base value:
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- for the income year in which an asset's start time occurs, is the asset's cost
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- for a later income year, is
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- the asset's opening adjustable value for that year, plus
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- any amount included in the asset's second element of cost for that year.
Days held is the number of days you held the asset in the income year in which:
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- you used it, or
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- you had it installed ready for use for any purpose.
Days held can be 366 for a leap year, even though the denominator remains 365.
For information on balancing adjustment events, see What happens if you no longer hold or use a depreciating asset?.
You cannot use the diminishing value method to work out the decline in value of:
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- in-house software
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- an item of intellectual property (except copyright in a film)
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- a spectrum licence, or
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- a telecommunications site access right.
Example: an asset's base value for its first and its second income years ignoring any GST impact
Leo purchased a computer for $4,000. The computer's base value in its first income year, which is when the computer is first used, is its cost of $4,000. If the computer's decline in value for that first income year is $1,000, and no amounts are included in the second element of the computer's cost, its base value for the second income year is its opening adjustable value of $3,000, that is, the cost of the computer ($4,000) less its decline in value ($1,000).
If Leo purchased the computer halfway through the income year then the calculation for the decline in value is $1,000 × 182 ÷ 365 = $499 and its base value for the second income year is $4,000 - $499 = $3,501.
Example: diminishing value method, ignoring any GST impact
Laura purchased a photocopier on 1 July 2023 for $1,500 and she started using it that day. It has an effective life of 5 years.
Laura chose to use the diminishing value method to work out the decline in value of the photocopier. The decline in value for 2023–24 is $602 worked out as follows:
1,500 × (366÷ 365) × (200% ÷ 5)
If Laura used the photocopier wholly for taxable purposes in 2023–24, she is entitled to a deduction equal to the decline in value. The adjustable value of the asset on 30 June 2024 is $898. This is the cost of the asset ($1,500) less its decline in value to 30 June 2024 ($602).
The prime cost method:
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- assumes the value of a depreciating asset decreases constantly over its effective life, and
- •
- produces a consistent decline in the item's value over time.
The formula for the annual decline in value using the prime cost method is:
asset's cost
× (
days held
÷ 365) × (100% ÷ asset's effective life)
The value of the asset's cost decreases every year by a constant amount. That constant amount is the actual cost divided by the number of years of effective life. In the first year, the value of the asset's cost is the actual cost of the asset.
If your asset cost $2,000 and has an effective life of 5 years, you can claim one fifth, 20%, of its cost, that is $400, in each of the 5 years, if you held the asset for the whole income year.
Days held is the number of days you held the asset in the income year in which:
- •
- you used it, or
- •
- you had it installed ready for use for any purpose.
Days held can be 366 for a leap year, even though the denominator remains 365.
For information on balancing adjustment events, such as the start and end dates, see What happens if you no longer hold or use a depreciating asset?
Example: prime cost method, ignoring any GST impact
Laura purchased a photocopier on 1 July 2023 for $1,500 and she started using it that day. It has an effective life of 5 years.
Laura chose to use the prime cost method to work out the decline in value of the photocopier. The decline in value for 2023–24 is $301 worked out as follows:
1500 × (366 ÷ 365) × (100% ÷ 5)
If Laura used the photocopier wholly for taxable purposes in 2023–24, she is entitled to a deduction equal to the decline in value. The adjustable value of the asset at 30 June 2024 is $1,199.
If there has been rollover relief and the transferor used the prime cost method to work out the asset's decline in value, the transferee should replace the asset's effective life in the prime cost formula with the asset's remaining effective life, that is, any period of the asset's effective life that is yet to elapse when the transferor stopped holding the asset; see Rollover relief.
An adjusted prime cost formula must be used if any of the following occurs:
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- you recalculate the effective life of an asset; see Effective life of a depreciating asset
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- an amount is included in the second element of an asset's cost in an income year after the initial income year in which the asset's start time occurs; see Cost of a depreciating asset
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- an asset's opening adjustable value is reduced by a debt forgiveness amount; see Commercial debt forgiveness
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- you reduced the opening adjustable value of a depreciating asset that is the replacement asset for an asset subject to an involuntary disposal; see Involuntary disposal of a depreciating asset
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- an asset's opening adjustable value is modified due to GST increasing or decreasing adjustments, input tax credits for the acquisition or importation of the asset, or input tax credits for amounts included in the second element of cost of an asset; see GST input tax credits, or
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- an asset's opening adjustable value is modified due to forex realisation gains or forex realisation losses; see Foreign currency gains and losses.
You must use the adjusted prime cost formula for the income year in which any of these changes are made (the 'change year') and later years. Where the asset's remaining effective life is any period of its effective life that is yet to elapse either at the start of the change year or, in the case of roll-over relief, when the balancing adjustment event occurs for the transferor, the formula for the decline in value is:
opening adjustable value for the change year plus any second element cost amounts for that year × (days held ÷ 365) × (100% ÷ asset's remaining effective life)
The prime cost formula must also be adjusted for certain intangible depreciating assets you acquire from a former holder; see Effective life of intangible depreciating assets.
Decline in value of a depreciating asset used for a non-taxable purpose
You calculate the decline in value and adjustable value of a depreciating asset from the start time independently of your use of the depreciating asset for a taxable purpose. However, you reduce your deduction for the decline in value by the extent that your use of the asset is for a non-taxable purpose.
If you initially use an asset for a non-taxable purpose, such as for a private purpose, and in later years use it for a taxable purpose, you need to work out the asset's decline in value from its start time including the years you used it for a private purpose. You can then work out your deductions for the decline in value of the asset for the years you used it for a taxable purpose.
Example: depreciating asset used partly for a taxable purpose, ignoring any GST impact
Leo bought a computer for $6,000 on 2 July 2023. He only used it for a taxable purpose 50% of the time during 2023–24.
If the computer's decline in value for 2023–24 is $1,500, Leo's deduction is reduced to $750, that is, 50% of the computer's decline in value for 2023–24.
The adjustable value on 30 June 2024 is $4,500 (that is, $6,000 - $1,500), irrespective of the extent of Leo's use of the computer for taxable purpose.
Example: depreciating asset initially used for a non-taxable purpose
Paul purchased a refrigerator on 1 July 2020 for $2,000 and immediately used it wholly for private purposes. He started a new business on 1 March 2024 and then used the refrigerator wholly in his business. Paul's refrigerator started to decline in value from 1 July 2020 as that was the day he first used it. He needs to work out the refrigerator's decline in value from that date. However, Paul can only claim a deduction for the decline in value for the period commencing 1 March 2024 when he used the refrigerator for a taxable purpose.
Paul chooses to use the prime cost method to work out the decline in value and adopts the Commissioner's determination of effective life for a refrigerator (10 years).
The decline in value of the refrigerator will be:
2020–21: $2,000 × (365 days ÷ 365 days) × (100% ÷ 10 years) = $200
2021–22: $2,000 × (365 days ÷ 365 days) × (100% ÷ 10 years) = $200
2022–23: $2,000 × (365 days ÷ 365 days) × (100% ÷ 10 years) = $200
2023–24: $2,000 × (366 days ÷ 365 days) × (100% ÷ 10 years) = $201
Although the refrigerator has declined in value since Paul started using it on 1 July 2020, a deduction for the decline in value is reduced by the extent it was not used for a taxable purpose. No deduction is available for 2020-21, 2021-22, 2022-23 as Paul used the refrigerator for private purposes. The 2023-24 deduction is reduced by 244 days (1 July 2023 to 29 February 2024).
(244 days ÷ 366 days) × $201 = $134
$201 - $134 = $67
For 2023–24 Paul will have a deduction of $67 for the decline in value for the refrigerator.
Decline in value of leisure facilities
Your deduction for the decline in value of a leisure facility may be reduced even though you use it, or install it ready for use, for a taxable purpose. Your deduction is limited to the extent that:
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- the asset's use is a fringe benefit, or
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- the leisure facility is used (or held for use) mainly in the ordinary course of your business of providing leisure facilities for payment, to produce your assessable income in the nature of rents or similar charges, or for your employees' use or the care of their children.
The total amount you can claim as a deduction for the decline in value of a boat that you use or hold cannot exceed your assessable income from using or holding that boat in 2023–24. If the total amount of your deduction exceeds the relevant assessable income, we reduce the deduction by the amount of the excess.
Exceptions to that reduction are:
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- holding a boat as your trading stock
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- using a boat (or holding it) mainly for letting it on hire in the ordinary course of a business that you carry on
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- using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on, or
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- using a boat for a purpose that is essential to the efficient conduct of a business that you carry on.
Depreciating asset acquired from an associate
If you acquired a depreciating asset from an associate, such as a relative or partner, and the associate has claimed or can claim deductions for the decline in value of the asset, you must use the same method of working out the decline in value that the associate used.
If the associate used the diminishing value method, you must use the same effective life that they used. If they used the prime cost method, you must use any remaining period of the effective life used by them.
You must recalculate the effective life of the depreciating asset if the asset's cost increases by 10% or more in any income year, including the year in which you start to hold it; see How to recalculate effective life.
You can require the associate to tell you the method and effective life they used by serving a notice on them within 60 days after you acquire the asset. Penalties can be imposed if the associate intentionally refuses or fails to comply with the notice.
Sale and leaseback arrangements
If you acquired a depreciating asset but the user of the asset does not change or is an associate of the former user, such as under a sale and leaseback arrangement, you must use the same method of working out the decline in value that the former holder used.
If the former holder used the diminishing value method, you must use the effective life that they used. If they used the prime cost method, you must use any remaining period of the effective life used by them. If you cannot readily ascertain the method that the former holder used or if they did not use a method, you must use the diminishing value method. You must use an effective life determined by the Commissioner if you cannot find out the effective life that the former holder used or if they did not use an effective life.
You must recalculate the effective life of the depreciating asset if the asset's cost increases by 10% or more in any income year, including the year in which you start to hold it; see How to recalculate effective life.
Immediate deduction for certain non-business depreciating assets (costing $300 or less)
Find out when you can claim an immediate deduction for the cost of certain non-business depreciating assets.
On this page
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- Eligibility criteria for claiming an immediate deduction
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- Cost is $300 or less
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- Used mainly to produce non-business assessable income
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- Not part of a set
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- Not one of a number of identical or substantially identical items
Eligibility criteria for claiming an immediate deduction
The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you used it for a taxable purpose during the income year in which the deduction is available.
The immediate deduction is available if all of the following tests are met for the asset:
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- it cost $300 or less; see Cost is $300 or less
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- you used it mainly for the purpose of producing assessable income that was not income from carrying on a business; see Used mainly to produce non-business assessable income
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- it was not part of a set of assets you started to hold in the income year that cost more than $300; see Not part of a set, and
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- it was not one of a number of identical or substantially identical assets you started to hold in the income year that together cost more than $300; see Not one of a number of identical or substantially identical items.
If you are not eligible to claim the immediate deduction, you work out the decline in value of the asset using the general rules for working out decline in value. Alternatively, you may be able to allocate the asset to a low-value pool; see Low-value pools.
This immediate deduction is not available for in-house software if you have allocated expenditure on it to a software development pool; see Software development pools.
The amount of the immediate deduction may need to be reduced if the changes which limit deductions for decline in value of certain second-hand depreciating assets in residential rental properties apply to the asset; see Second-hand depreciating assets in residential rental properties.
If you are entitled to a GST input tax credit for the asset, the cost is reduced by the input tax credit before determining whether the cost is $300 or less.
If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, you can claim the immediate deduction even though the depreciating asset in which you have an interest costs more than $300; see Jointly held depreciating assets.
Example: cost is $300 or less, ignoring any GST impact
John, Margaret and Neil jointly own a rental property in the proportions of 50%, 25% and 25%. Based on their respective interests, they contribute $400, $200 and $200 to acquire a new refrigerator for the rental property. Margaret and Neil can claim an immediate deduction because the cost of their interest in the refrigerator does not exceed $300. John cannot claim an immediate deduction because the cost of his interest is more than $300.
Used mainly to produce non-business assessable income
Some examples of depreciating assets used to produce non-business income are:
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- a briefcase or tools of trade used by an employee
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- freestanding furniture in a residential rental property that was purchased as new after 9 May 2017 and had never been used previously
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- a calculator used in managing an investment portfolio.
To claim the immediate deduction, you must use the depreciating asset more than 50% of the time for producing non-business assessable income.
If you meet this test, you can use the asset for other purposes (such as to carry on a business) and still claim the deduction. However, if you use the asset mainly for producing non-business assessable income but you also use the asset for a non-taxable purpose, then the amount of deduction must be reduced by the amount attributable to the use for a non-taxable purpose.
Example: depreciating asset used mainly to produce non-business assessable income, ignoring any GST impact
Rob buys a calculator for $150. The calculator is used 40% of the time by him in his business and 60% of the time for managing his share portfolio. As the calculator is used more than 50% of the time for producing non-business assessable income, he can claim an immediate deduction of $150.
If Rob used his calculator 40% of the time for private purposes and 60% of the time for managing his share portfolio, he is still using the calculator more than 50% of the time for producing non-business assessable income. However, his deduction would be reduced by 40% to reflect his private use of the asset.
You need to determine whether items form a set on a case-by-case basis. You can regard items as a set if they are:
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- dependent on each other
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- marketed as a set, or
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- designed and intended to be used together.
It is the cost of a set of assets you acquire in the income year that must not exceed $300. You cannot avoid the test by buying parts of a set separately.
Example: set of items, ignoring any GST impact
In 2023–24, Paula, a primary school teacher, bought a series of 6 progressive reading books costing $65 each. The books are designed so that pupils move on to the next book only when they have successfully completed the previous book. The books are marketed as a set and are designed to be used together. The 6 books would be regarded as a set. Paula cannot claim an immediate deduction for any of these books because they form part of a set which she acquired in the income year, and the total cost of the set was more than $300.
Example: not a set, ignoring any GST impact
Marie, an employee, buys a range of tools for her tool kit for work (a shifting spanner, a boxed set of screwdrivers and a hammer). Each item costs $300 or less. While the tools add to Marie's tool kit, they are not a set. It would make no difference if Marie purchased the items at the same time and from the same supplier or manufacturer. An immediate deduction is available for all the items, including the screwdrivers. The screwdrivers are a set as they are marketed and used as a set. However, as the cost is $300 or less, the deduction is available.
A group of assets acquired in an income year can be a set in themselves, even though they also form part of a larger set acquired over more than one income year. If the assets acquired in an income year are a set, then the total cost of that set must not exceed $300. Assets acquired in another income year that form part of a larger set are not taken into account when working out the total cost of a set and whether items form a set.
Example: set of items part of a larger set, ignoring any GST impact
In 2023–24, Paula, a primary school teacher, hears about a series of 12 progressive reading books. The books are designed so that pupils move on to the next book only when they have successfully completed the previous book. The first 6 books are at a basic level while the second 6 are at an advanced level.
Paula buys one book a month beginning in January and by 30 June 2024, she holds the first 6 books (the basic readers) at a total cost of $240. Because of the interdependency of the books, the 6 books are a set even though they can be purchased individually and they form part of a larger set. An immediate deduction is available for each book because the cost of the set Paula acquired during the income year was not more than $300.
If Paula acquires the other 6 books (the advanced readers) in the following income year, they would be regarded as a set acquired in that year.
The concept of a set requires more than one depreciating asset. In some cases, however, more than one item may be a single depreciating asset. An example would be a 3 volume dictionary. This is a single depreciating asset, not a set of 3 separate depreciating assets, as the 3 volumes have a single integrated function.
Not one of a number of identical or substantially identical items
Items are identical if they are the same in all respects. Items are substantially identical if they are the same in most respects even though there may be some minor or incidental differences. Factors to consider include colour, shape, function, texture, composition, brand and design.
The total cost of the asset and any other identical or substantially identical asset that you acquired in the income year must not exceed $300. Don't take into account assets that you acquired in another income year.
Example: substantially identical items, ignoring any GST impact
Jan buys 3 new kitchen stools for her rental property in 2023–24. The stools are all wooden and of the same design but they are different colours. The colour of the stools is only a minor difference which is not enough to conclude that the stools are not substantially identical.
The stools cost $150 each. Jan cannot claim an immediate deduction for the cost of each individual stool because they are substantially identical and the total cost of the 3 stools exceeds $300.
Example: not substantially identical items
Jan also buys some new chairs for her rental property: a canvas chair for the patio, a high-back wooden chair for the bedroom dressing table and a leather executive chair for the study. While these are all chairs, they are not identical or substantially identical. Jan can claim the cost of each chair as an immediate deduction if the chair costs $300 or less.
Effective life of a depreciating asset
Find out about the effective life of depreciating assets (how long it can be used for a taxable purpose).
On this page
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- About the effective life
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- Choice of determining effective life
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- Working out the effective life yourself
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- Commissioner's determination
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- Statutory caps on the Commissioner's determination of effective life
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- Effective life of intangible depreciating assets
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- Effective life of intangible depreciating assets that are mining, quarrying or prospecting rights, or mining, quarrying or prospecting information
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- Choice of recalculating effective life
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- Requirement to recalculate effective life
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- Howtorecalculateeffectivelife
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- Effect of recalculating effective life
Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income or conducting R&D activities:
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- having regard to the wear and tear you reasonably expect from your expected circumstances of use
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- assuming that it will be maintained in reasonably good order and condition, and
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- having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.
Effective life is expressed in years, including fractions of years. Effective life is not rounded to the nearest whole year.
Choice of determining effective life
For most depreciating assets, you have the choice of either working out the effective life yourself or using an effective life determined by the Commissioner.
You must make the choice for the income year in which the asset's start time occurs. Generally, you must make the choice by the time you lodge your income tax return for that year.
However, the choice is not available:
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- for most intangible depreciating assets; see Effective life of intangible depreciating assets
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- if a depreciating asset was acquired from an associate who claimed or could have claimed deductions for the asset's decline in value; see Depreciating asset acquired from an associate
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- for a depreciating asset that you started to hold but the user of the asset did not change or is an associate of the former user, for example, under a sale and leaseback arrangement; see Sale and leaseback arrangements
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- if there has been rollover relief; see Rollover relief.
Working out the effective life yourself
Subject to the exclusions above, you can work out the asset's effective life yourself, by determining how many years it will reasonably be expected to produce income given the specific way it's likely to be used. The sort of information that you could use to make an estimate of the effective life of an asset includes (but not limited to):
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- the physical life of the asset
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- engineering information
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- the manufacturer's specifications
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- your own past experience with similar assets
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- the past experience of other users of similar assets
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- industry standards
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- obsolescence
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- the level of repairs and maintenance commonly adopted by users of the asset
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- retention periods
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- scrapping or abandonment practices.
You work out the effective life of a depreciating asset from the asset's start time.
In making his determination, the Commissioner assumes that the depreciating asset is new and has regard to general industry circumstances of use.
As a general rule, use the effective life that is in force at the time (the relevant time) you:
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- enter into a contract to acquire the asset
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- otherwise acquire the asset, or
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- start to construct the asset.
However, if the asset's start time does not occur within 5 years of this time, you must use the effective life that is in force at the asset's start time. For an item of plant acquired under a contract entered into, otherwise acquired or started to be constructed before 11:45 am AEST on 21 September 1999, there is no restriction on the period within which the plant must be used. The general rule in the previous paragraph applies to such plant.
The latest Taxation Ruling is TR 2022/1 Income tax: effective life of depreciating assets (applicable from 1 July 2022), which lists the Commissioner's determinations of the effective life for various depreciating assets.
You need to work out which effective life applies. You may have to use a previous effective life ruling. See Capital allowances: effective life – determinations, rulings and law.
TR 2022/1 will be withdrawn when the latest Legislative Instrument for the Commissioner's effective life determinations is published.
Statutory caps on the Commissioner's determination of effective life
There are statutory caps on the Commissioner's determined effective life for certain depreciating assets. This means if you choose to use the Commissioner's determination of effective life for an asset subject to a capped life, you must use the capped life if it is shorter than the Commissioner's determination.
Assets with capped lives include aeroplanes; helicopters; certain shipping vessels, certain buses, light commercial vehicles, trucks and trailers; and certain assets used in the oil and gas industries. For more information, see Taxation Ruling TR 2022/1.
Effective life of intangible depreciating assets
| Item number | Asset | Effective life in years |
|---|---|---|
| 1 | Standard patent | 20 |
| 2 | Innovation patent | 8 |
| 3 | Petty patent | 6 |
| 4 | Registered design | 15 |
| 5 | Copyright (except copyright in a film) | The shorter of 25 years from when you acquire it or the period until the copyright ends |
| 6 | A licence (except one relating to a copyright or in-house software) | The term of the licence |
| 7 | A licence relating to a copyright (except copyright in a film) | The shorter of 25 years from when you become the licensee or the period until the licence ends |
| 8 | In-house software | 5 |
| 9 | Spectrum licence | The term of the licence |
| 14 | Telecommunications site access right | The term of the right |
For more information, see In-house software.
You don't have the choice of either working out the effective life yourself or using an effective life determined by the Commissioner for the intangible depreciating assets in the table above and other intangible depreciating assets. In addition, the effective life of these depreciating assets cannot be recalculated.
The effective life of an indefeasible right to use a telecommunications cable system is the effective life of the telecommunications cable over which the right is granted.
The effective life of any other intangible depreciating asset (which is not an indefeasible right to use a telecommunications cable system or a mining, quarrying or prospecting right) cannot be longer than the term of the asset as extended by any reasonably assured extension or renewal of that term.
If you acquired any of the intangible assets listed in the above table (except items 5, 7 or 8) from a former holder and you calculate the asset's decline in value using the prime cost method, in the formula you must use the number of years remaining in that effective life at the start of the income year you acquired the asset, not the effective life shown in the table.
Effective life of intangible depreciating assets that are mining, quarrying or prospecting rights, or mining, quarrying or prospecting information
| Asset | Effective life in years |
|---|---|
| A mining, quarrying or prospecting right or mining, quarrying or prospecting information, relating to mining and quarrying operations (except obtaining petroleum or quarry materials) | The life of the mine or proposed mine to which the right or information relates or, if there is more than one, the life of the mine that has the longest estimated life |
| A mining, quarrying or prospecting right or mining, quarrying or prospecting information, relating to mining and quarrying operations to obtain petroleum | The life of the petroleum field or proposed petroleum field to which the right or information relates or, if there is more than one, the life of the petroleum field that has the longest estimated life |
| A mining, quarrying or prospecting right or mining, quarrying or prospecting information, relating to mining and quarrying operations to obtain quarry materials | The life of the quarry or proposed quarry to which the right or information relates or, if there is more than one, the life of the quarry that has the longest estimated life |
If you acquire a mining, quarrying or prospecting right or mining, quarrying or prospecting information listed in the above table, you will need to work out the effective life yourself.
For example, for a mining, quarrying or prospecting right relating to mining and quarrying operations, you will do this by estimating the period until the end of the life of the mine or proposed mine to which the right relates or, if there is more than one such mine, the life of the mine that has the longest estimated life. You work out this period:
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- from the start time of the mining, quarrying or prospecting right, and
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- by reference only to the period of time over which the reserves, reasonably estimated using an appropriate accepted industry practice, are expected to be extracted from the mine, petroleum field or quarry.
You will have a choice of using either the prime cost or diminishing value method to work out the decline in value of the mining, quarrying or prospecting right.
However, the effective life of a mining, quarrying or prospecting right, or mining, quarrying or prospecting information, is 15 years if the right or information does not relate to:
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- a mine or proposed mine
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- a petroleum field or proposed petroleum field, or
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- a quarry or proposed quarry.
You will also be able to choose to recalculate the effective life of a mining, quarrying or prospecting right or mining, quarrying or prospecting information if the effective life you have been using is no longer accurate because of changed circumstances.
Some examples of circumstances that could cause a variation include:
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- a considerable structural price change for the mineral being extracted which leads to the mine's premature permanent closure
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- previously uneconomically mineable geologies becoming economically mineable
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- a noticeable improvement in extraction methods or transport arrangements from the mine which leads to faster extraction of the mineral and a consequential shortening of the remaining life of the mine
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- new information becoming available as a result of further exploration or prospecting on the mining tenement as to the presence of minerals likely to be recoverable which leads to an increase in the remaining life of the mine
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- a change to the accepted industry practice that affects the estimation of the life of the mine
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- the right or information now relates to an existing or proposed mine, petroleum field or quarry
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- the right or information no longer relates to an existing or proposed mine, petroleum field or quarry.
Choice of recalculating effective life
You may choose to recalculate the effective life of a depreciating asset if the effective life you have been using is no longer accurate because the circumstances relating to the nature of the asset's use have changed.
You can recalculate an asset's effective life each time those circumstances change. It can be done in any income year after the one in which the asset's start time occurs, and whether you worked out the previous effective life yourself or you used the effective life determined by the Commissioner.
Some examples of changed circumstances relating to the nature of the use of an asset are:
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- your use of the asset turns out to be more or less rigorous than expected
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- there is a downturn in the demand for the goods or services that the asset is used to produce that will result in the asset being scrapped
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- legislation prevents the asset's continued use
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- changes in technology make the asset redundant, or
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- there is an unexpected demand, or lack of success, for a film.
You cannot choose to recalculate the effective life of any depreciating asset for which you:
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- used accelerated rates of depreciation before 1 July 2001, or
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- could have used accelerated rates of depreciation before 1 July 2001, if you had used the asset to produce assessable income or had it installed ready for that use.
In addition, the effective life of certain intangible depreciating assets cannot be recalculated; see Effective life of intangible depreciating assets.
Requirement to recalculate effective life
You must recalculate the effective life of a depreciating asset if its cost is increased by 10% or more in an income year after the income year in which its start time occurs and:
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- you worked out the effective life of the asset yourself, or
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- you used the Commissioner's determination of effective life (or a capped life) and the prime cost method to work out the asset's decline in value, or
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- you acquired the asset from an associate who claimed or could have claimed deductions for its decline in value; see Depreciating asset acquired from an associate, or
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- you became the asset's holder, where the user of the asset does not change or is an associate of the former user, for example, under a sale and leaseback arrangement; see Sale and leaseback arrangements.
Even though you may be required to recalculate the effective life of an asset, you may conclude that the effective life remains the same.
How to recalculate effective life
You work out the recalculated effective life from the depreciating asset's start time. You use the same principles to recalculate the effective life of a depreciating asset that you would use to work out the original effective life yourself; see Working out the effective life yourself.
Effect of recalculating effective life
If you recalculate the effective life of a depreciating asset, the new effective life starts to apply for the income year for which you make the recalculation.
If you are using the diminishing value method to work out the decline in value of a depreciating asset, you use the new estimate of effective life in the formula as the asset's effective life. Under the prime cost method, you must use the adjusted prime cost formula from the year for which you recalculate the asset's effective life; for information about the adjusted prime cost formula, see Methods of working out decline in value.
Cost of a depreciating asset
About the cost of a depreciating asset, limitations or arrangements you need to take into account for decline in value.
On this page
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- Working out the cost
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- Jointly held depreciating assets
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- GST input tax credits
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- Car limit
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- Car acquired at a discount
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- Non-arm's length and private or domestic arrangements
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- Depreciating asset acquired with other property
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- Hire purchase agreements
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- Death of the holder
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- Commercial debt forgiveness
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- Recoupment of cost
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- Foreign currency gains and losses
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- Jointly held depreciating assets
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- GST input tax credits
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- Car limit
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- Car acquired at a discount
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- Non-arm's length and private or domestic arrangements
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- Depreciating asset acquired with other property
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- Hire purchase agreements
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- Death of the holder
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- Commercial debt forgiveness
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- Recoupment of cost
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- Foreign currency gains and losses
To work out the decline in value of a depreciating asset, you need to know its cost.
Under UCA, the cost of a depreciating asset has 2 elements.
The first element of cost is, generally, amounts you are taken to have paid to hold the asset, such as the purchase price. It also includes amounts incurred after 30 June 2005 that you are taken to have paid for starting to hold the asset. The amounts must be directly connected with holding the asset.
The first element of cost is worked out as at the time you begin to hold the asset.
The second element of cost is, generally, amounts you are taken to have paid after that time to bring the asset to its present condition and location, such as a cost of improving the asset. It also includes expenses incurred after 30 June 2005 for a balancing adjustment event occurring for the asset (that is, costs incurred to stop holding or using the asset). For information on balancing adjustment events, see What happens if you no longer hold or use a depreciating asset?. Such expenses may include advertising or commission expenses or the cost of demolishing the asset.
The first element cannot include an amount that forms part of the second element of another depreciating asset's cost. For example, if a depreciating asset is demolished so another depreciating asset can be installed on the same site, the demolition costs will form part of the second element of cost for the asset demolished. The amount is not also included in the first element of cost for the new asset.
Example: first and second elements of cost, ignoring any GST impact
Terry wants to buy a vehicle for his business and the vehicle is not available in Australia. He locates a company in the United States from which he would be able to purchase the vehicle. He travels to the United States for the sole purpose of buying the vehicle and incurs travel costs of $5,000. Terry purchases the vehicle for $45,000.
The first element of cost is $50,000. This amount includes the purchase cost of the vehicle and the travel costs. The travel costs would be included in the first element of cost of the vehicle because they are directly connected with Terry starting to hold the vehicle. If Terry installs an alarm in the vehicle 2 months later at a cost of $1,500, that amount will be included in the second element of cost of the vehicle as the cost was incurred after he began to hold the vehicle.
For both first and second elements of cost of a depreciating asset, amounts you are taken to have paid include:
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- an amount you pay
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- the market value of a non-cash benefit you provide (for instance, in a salary sacrifice arrangement the market value is represented by the price paid by the employer under an arm's length arrangement. The employee can claim an amount for the decline in value, to the extent it is used for a taxable purpose)
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- if you incur or increase a liability to pay an amount, the amount of the liability or increase
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- if you incur or increase a liability to provide a non-cash benefit, the market value of the non-cash benefit or the increase
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- if all or part of another's liability to pay you an amount is terminated, the amount of the liability or part terminated
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- if all or part of another's liability to provide a non-cash benefit (except the depreciating asset) to you is terminated, the market value of the non-cash benefit or part terminated.
The cost of a depreciating asset does not include:
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- amounts of input tax credits to which you are or become entitled; see GST input tax credits
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- expenditure not of a capital nature, or
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- any amount that you can deduct or that is taken into account in working out a deductible amount under provisions outside UCA.
Examples: expenditure not of a capital nature and deductible outside UCA
Carolyn uses a motor vehicle for her business. As a result of Carolyn's use of the vehicle, she needs to replace the tyres. The cost of replacing the tyres is not included in the second element of the vehicle's cost because it is ordinarily deductible under the repair provisions.
David operates a refrigerated truck as part of his business. David replaces the refrigeration unit in his truck with a new unit (that performs the same function as the replaced unit). The replacement refrigeration unit is an integral part of the refrigerated van (that is located on a truck's chassis) that is incapable of providing a useful function without the other part of the truck. The restoration of the effectiveness of the refrigeration truck by replacing the refrigeration unit is therefore a repair and not expenditure of a capital nature. The cost of replacing the refrigeration unit is not included in the second element of the truck's cost because it is ordinarily deductible under the repairs provisions.
There are special rules to work out the cost of depreciating assets in certain circumstances. Some of the common cases are covered below. If you are not sure of the cost of a depreciating asset, contact us or your recognised tax adviser.
Jointly held depreciating assets
If a depreciating asset is held by more than one person, each holder works out their deduction for the decline in value of the asset based on the cost of their interest in the asset and not the cost of the asset itself.
If the acquisition or importation of a depreciating asset constitutes a creditable acquisition or a creditable importation, the cost of the asset is reduced by any input tax credit you are, or become, entitled to for the acquisition or importation. If you become entitled to the input tax credit in an income year after the one in which the asset's start time occurred, the asset's opening adjustable value is also reduced by the amount of the input tax credit.
If the cost of a depreciating asset is taken to be its market value (such as for assets acquired under a private or domestic arrangement), the market value is reduced by any input tax credit to which you would be entitled had the acquisition been solely for a creditable purpose.
Similarly, any input tax credit you are entitled to claim for the second element of a depreciating asset's cost reduces the cost of the asset. Its opening adjustable value is also reduced if you become entitled to the input tax credit in an income year after the one in which the asset's start time occurred.
Certain adjustments under the GST legislation reduce or increase the cost and, in some cases, the opening adjustable value of the asset. For example, these can commonly arise in the event of a change in price or because of the application of volume discounts. Other adjustments are treated as an outright deduction or income.
Cars designed mainly for carrying passengers are subject to a car limit. That means there is a limit on the cost of the car that can be claimed as decline in value deductions. If the first element of cost exceeds the car limit for the income year in which you start to hold it, that first element of cost is reduced to the car limit.
The car limit for 2023–24 is $68,108.
Before applying the car limit you may need to:
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- increase the cost of the car if you acquired the car at a discount; see Car acquired at a discount
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- reduce the cost of the car by input tax credits; see GST input tax credits.
If a car with a cost exceeding the car limit is held by more than one person, the car limit is applied to the cost of the car and not to each holder's interest in the car. Once the car limit has been applied, the cost of the car (reduced to the car limit) is apportioned between each holder's interest. Each holder then works out their deduction for the decline in value of the car; see Jointly held depreciating assets.
This car limit also applies under the luxury car lease rules; see Leased luxury cars.
The car limit does not apply in certain circumstances to some cars fitted out for transporting disabled people.
When a balancing adjustment event occurs for the car, the termination value must be adjusted under a special formula; see Balancing adjustment rules for cars.
If a car is acquired at a discount, the first element of its cost may be increased by the discount portion. The discount portion is any part of the discount that is due to the sale of another asset for less than market value, for example, a trade-in.
A car's cost is not affected by a discount obtained for other reasons.
Make the adjustment only if:
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- the cost of the car (after GST credits or adjustments) plus the discount portion exceeds the car limit, and
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- you, or another entity, have deducted or can deduct an amount for the other asset for any income year.
This rule does not apply to some cars fitted out for transporting disabled people.
When a balancing adjustment event occurs for the car, the termination value must be increased by the same discount portion; see Balancing adjustment rules for cars.
Example: car acquired at a discount, ignoring any GST impact
Kristine arranges to buy a $69,000 sedan for business use from Greg, a car dealer. She offers the station wagon she is using for this purpose, worth $20,000, as a trade-in. Greg agrees to reduce the price of the sedan to below the car limit if Kristine accepts less than market value for the trade-in. Kristine accepts $15,000 for the trade-in, so the price of the sedan is reduced to $64,000 (after a discount of $5,000).
The cost of the sedan plus the discount is more than the car limit so the first element of the sedan's cost is increased by the amount of the discount to $69,000. As the first element of cost then exceeds the car limit, it must be reduced to the car limit for the income year. The termination value of the station wagon would be taken to be the market value of $20,000 as Kristine and Greg were not dealing at arm's length; see Termination value.
Non-arm's length and private or domestic arrangements
The first element of a depreciating asset's cost is the market value of the asset at the time you start to hold it if:
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- the first element of the asset's cost would otherwise exceed its market value and you don't deal at arm's length with another party to the transaction, or
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- you started to hold the asset under a private or domestic arrangement (for example, as a gift from a family member).
Similar rules apply to the second element of a depreciating asset's cost. For example, if something is done to improve your depreciating asset under a private or domestic arrangement, the second element of the asset's cost is the market value of the improvement when it is made.
The market value may need to be reduced for any input tax credits to which you would have been entitled; see GST input tax credits.
Note that there are special rules for working out the effective life and decline in value of a depreciating asset acquired from an associate, such as a spouse or partner; see Depreciating asset acquired from an associate.
Depreciating asset acquired with other property
If you pay an amount for a depreciating asset and something else, only that part of the payment that is reasonably attributable to the depreciating asset is treated as being paid for it. This applies to both the first and second elements of cost.
Apportionment on the basis of the market values of the various items for which the payment is made will generally be reasonable.
Example: apportionment of cost
Sam undertakes to pay an upholsterer $800 for a new desk and $300 to re-upholster a chair in a more durable material. He negotiates a trade discount of $100. The $1,000 paid should be apportioned between:
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- the first element of cost of the desk, and
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- the second element of cost of the chair.
The apportionment should be done based on the relative market values of the desk and the labour and materials used to upholster the chair.
For income tax purposes, certain hire purchase agreements are treated as notional sale and loan transactions.
If the goods subject to the hire purchase agreement are depreciating assets and the hirer is the holder of the depreciating assets (see Depreciating assets subject to hire purchase agreements) the hirer may be entitled to deductions for the decline in value. Generally, the cost or value stated in the hire purchase agreement or the arm's length value is taken to be the cost of the depreciating assets.
If a depreciating asset starts being held by you as a legal personal representative (say, as the executor of an estate) as a result of the death of the former holder, the cost of the asset to you is generally its adjustable value on the day the former holder died.
If the former holder allocated the asset to a low-value pool, the cost of the asset to you is the amount of the closing balance of the pool for the income year in which the former holder died that is reasonably attributable to the asset; see Low-value pools.
If you start to hold a depreciating asset because it passes to you as a beneficiary of an estate or as a surviving joint tenant, the cost of the asset to you is its market value when you started to hold it reduced by any capital gain that was ignored when the owner died or when it passed from the legal personal representative. See Guide to capital gains tax 2023 for information on when these gains can be disregarded.
Generally, an amount that you owe is a commercial debt if you can claim a deduction for the interest paid on the debt or you would have been able to claim a deduction for interest if it had been charged. The amount of the commercial debt includes any accrued but unpaid interest.
If a commercial debt is forgiven, you may be required to make a reduction for a depreciating asset. If a reduction is made for a depreciating asset, the asset's cost is reduced by the debt forgiveness amount. If the reduction is made in a year later than the one in which the asset's start time occurs, the opening adjustable value of the asset is also reduced.
If an asset's opening adjustable value is reduced and you use the prime cost method to work out the asset's decline in value, you need to use the adjusted prime cost formula for the income year that the change is made and in later years; see Methods of working out decline in value.
If you recoup an amount that you had previously included in the cost of a depreciating asset, you may need to include that recouped amount in your assessable income. An amount you receive for the sale of a depreciating asset at market value is not an assessable recoupment.
Foreign currency gains and losses
If you purchased a depreciating asset in foreign currency, the first element of the asset's cost is converted to Australian currency at the exchange rate applicable when you began to hold the asset, or when the obligation was satisfied, whichever occurred first.
From 1 July 2003, if the foreign currency amount became due for payment within the 24-month period that began 12 months before the time when you began to hold the depreciating asset, any realised foreign currency gain or loss (referred to as a forex realisation gain or a forex realisation loss) can modify the asset's cost, the opening adjustable value, or the opening balance of your low-value pool (as the case may be). Otherwise, that gain or loss is included in assessable income or allowed as a deduction, respectively.
If the foreign currency amount relates to the second element of the cost of a depreciating asset, the translation to Australian currency is made at the exchange rate applicable at the time you incurred the relevant expenditure. Here, a 12-month rule applies instead of the 24-month rule. The 12-month rule requires that the foreign currency became due for payment within 12 months after the time you incurred the relevant expenditure. In some circumstances you may be able to elect that forex gains and losses don't modify the asset's cost, the opening adjustable value or the opening balance of your low-value pool. For more information, see Election out of the 12 month rule.
What happens if you no longer hold or use a depreciating asset?
Find out what happens if you no longer hold or use a depreciating asset.
On this page
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- No longer hold or use a depreciating asset
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- Termination value
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- Non-arm's length and private or domestic arrangements
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- Selling a depreciating asset with other property
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- Depreciating asset you stop using or never use
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- Death of the holder
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- Depreciating asset used for a non-taxable purpose
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- Leisure facilities and boats
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- Balancing adjustment rules for second-hand depreciating assets in residential rental properties
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- Plant acquired before 21 September 1999 and other depreciating assets acquired before 1 July 2001
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- Balancing adjustment rules for cars
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- Involuntary disposal of a depreciating asset
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- Rollover relief
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- Interest realignment arrangements
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- Limited recourse debt arrangements
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- Split or merged depreciating assets
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- Foreign currency gains and losses
No longer hold or use a depreciating asset
If you cease to hold or use a depreciating asset, a balancing adjustment event may occur. If there is a balancing adjustment event, you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.
A balancing adjustment event occurs for a depreciating asset when:
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- you stop holding it, for example, if the asset is sold, lost or destroyed
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- you stop using it and expect never to use it again
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- you stop having it installed ready for use and you expect never to install it ready for use
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- you have not used it and decide never to use it, or
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- a change occurs in the holding or interests in an asset which was or is to become a partnership asset.
A balancing adjustment event does not occur just because a depreciating asset is split or merged; see Split or merged depreciating assets.
However, a balancing adjustment event does occur if you stop holding part of a depreciating asset.
Expenses of a balancing adjustment event (such as advertising or commission expenses) may be included in the second element of the cost of the depreciating asset (unless you stop holding the asset under a non-arm's length arrangement and the termination value is less than the market value at the time you cease to hold it); see Cost of a depreciating asset.
You work out the balancing adjustment amount by comparing the asset's termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event; see Termination value.
If the termination value is greater than the adjustable value, you include the excess in your assessable income.
If the termination value is less than the adjustable value, you can deduct the difference.
Example: working out an assessable balancing adjustment amount, ignoring any GST impact
Bridget purchased a cabinet that she held for 2 years and used wholly for a taxable purpose. She then sold the cabinet for $1,300. Its adjustable value at the time was $1,200.
As the termination value of $1,300 is greater than the adjustable value of the cabinet at the time of its sale, the difference of $100 is included in Bridget's assessable income as an assessable balancing adjustment amount.
Example: working out a deductible balancing adjustment amount, ignoring any GST impact
If Bridget sold the cabinet for $1,000, the termination value would be less than the adjustable value of the cabinet at the time of its sale ($1,200). The difference of $200 is a deductible balancing adjustment amount.
There are situations where these general balancing adjustment rules don't apply:
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- If a depreciating asset has been partly used for a non-taxable purpose, the balancing adjustment amount is reduced to reflect only the taxable use. Additionally, a capital gain or capital loss can arise to the extent that the depreciating asset was used for a non-taxable purpose; see Depreciating asset used for a non-taxable purpose.
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- Similarly, if the depreciating asset is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced, the balancing adjustment amount is reduced and a capital gain or capital loss can arise; see Leisure facilities and boats.
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- If a depreciating asset is a second-hand depreciating asset in your residential rental property and your deductions for the decline in value of that asset have been reduced, the balancing adjustment amount is reduced to account for the proportion you have not been able to deduct. Additionally, a capital gain or a capital loss can arise; see Balancing adjustment rules for second-hand depreciating assets in residential rental properties and Second-hand depreciating assets in residential rental properties.
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- There are special balancing adjustment rules for cars; see Balancing adjustment rules for cars.
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- A balancing adjustment event for a depreciating asset in a low-value or common-rate pool or for which expenditure has been allocated to a software development pool is dealt with under specific rules for those pools; see Balancing adjustment event for a depreciating asset in a low-value pool and Software development pools.
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- If the disposal of a depreciating asset is involuntary, you may be able to offset an assessable balancing adjustment amount; see Involuntary disposal of a depreciating asset.
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- The assessment of a balancing adjustment amount for an eligible vessel may be deferred for 2 years where a certificate obtained under the Shipping Reform (Tax Incentives) Act 2012 applied to that vessel on the day of the balancing adjustment event. Additionally, rollover relief on the deferred amount may be available.
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- Rollover relief may apply to the disposal of a depreciating asset in certain circumstances, such as where an asset is transferred between spouses pursuant to a court order following a marriage breakdown; see Rollover relief.
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- Rollover relief may also apply to interest realignment arrangements where the taxpayer's original interest in a mining, quarrying or prospecting right was acquired after 1 July 2001; see Interest realignment arrangements.
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- There are no specific balancing adjustment rules for some primary production depreciating assets (see Primary production depreciating assets) or certain depreciating assets used for landcare operations, electricity connections or phone lines (see Landcare operations and Electricity connections and phone lines). However, such assets may be considered part of land for capital gains tax (CGT) purposes.
There are special balancing adjustment rules for depreciating assets used in carrying on research and development activities; for more information see Research and development tax incentive schedule instructions 2024.
A balancing adjustment event may occur if you claimed temporary full expensing for a depreciating asset, on either the cost of acquisition or of improvements in 2020–21, 2021–22 or 2022–23. If so, you need to calculate a balancing adjustment amount.
Any non-taxable use of an asset in an income year after the year in which temporary full expensing has been claimed will not reduce balancing adjustment amounts for balancing adjustment events happening after the claim year.
For more information, see Balancing adjustment event.
A special balancing adjustment event will also occur in an income year after the year in which temporary full expensing has been claimed when:
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- it is no longer reasonable to conclude that you will use the depreciating asset principally in Australia for the principal purpose of carrying on a business, or
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- it becomes reasonable to conclude that the depreciating asset will never be located in Australia.
This special balancing adjustment event is not triggered if you use the simplified depreciation rules, other than for those depreciating assets that are excluded from the simplified depreciation rules. For those other depreciating assets, the event may still be triggered if temporary full expensing has been claimed for that asset.
If this special balancing adjustment event is triggered:
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- you are treated as though you ceased to hold the asset and the termination value of the asset is equal to its market value at that time, resulting in the temporary full expensing deduction being clawed back to the asset's market value at that time, and
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- the first element of cost is modified so that the first element of cost of the asset is the asset's termination value at the time of the event, such that though you may not thereafter work out the decline in value for that asset using temporary full expensing, you might, in a later income year, be entitled to claim other capital allowances that you are entitled to for that asset (for example, under the general capital allowances rules for the proportion of business use). You may not claim a deduction for the asset under the general capital allowance rules in the same income year as the special balancing adjustment event.
A GST liability will generally occur when a depreciating asset is disposed of by a GST registered entity. For more information, see GST and the disposal of capital assets.
The termination value is, generally, what you receive or are taken to receive for the asset when a balancing adjustment event occurs. It is made up of amounts you receive and the market value of non-cash benefits (such as goods or services) you receive for the asset.
The most common example of termination value is the proceeds from selling an asset. The termination value may also be an insurance payout for the loss or destruction of a depreciating asset.
The termination value is reduced by the GST payable if the balancing adjustment event is a taxable supply. It can be modified by increasing or decreasing adjustments.
If the termination value is taken to be the market value of the asset (for example, in the case of assets disposed of under a private or domestic arrangement), the market value is reduced by any input tax credit to which you would be entitled had you acquired the asset solely for a creditable purpose.
An amount is not an assessable recoupment if it is included in the termination value of a depreciating asset; see Recoupment of cost.
There are special rules to work out the termination value of depreciating assets in certain circumstances. Some of the more common cases are covered below. If you are not sure of the termination value of a depreciating asset, contact us or your recognised tax adviser.
Non-arm's length and private or domestic arrangements
The termination value of a depreciating asset is its market value just before you stopped holding it where:
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- the termination value would otherwise be less than market value and you did not deal at arm's length with another party to the transaction, or
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- you stopped holding the asset as a result of a private or domestic arrangement (for instance, you gave the asset to a family member).
Selling a depreciating asset with other property
If you received an amount for the sale of several items that include a depreciating asset, you need to apportion the amount received between the termination value of the depreciating asset and the other items. The termination value is only that part of what you received that is reasonably attributable to the asset.
Apportionment on the basis of the market values of the various items for which the amount is received will be acceptable.
Example: depreciating asset sold with other property, ignoring any GST impact
Ben receives $100,000 for the sale of both a chainsaw (a depreciating asset) and a block of land (not a depreciating asset). It would be reasonable to apportion the $100,000 between:
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- the termination value of the chainsaw, and
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- the proceeds of sale for the land
The apportionment should be done based on the relative market values of the chainsaw and the land at the time of the sale.
Depreciating asset you stop using or never use
The termination value of a unit of in-house software you still hold but stop using and expect never to use again, or decide never to use, is zero. See In-house software.
For any other asset, if you stop using it and expect never to use it again but still hold it, the termination value is the market value when you stop using it. For a depreciating asset you decide never to use but still hold, the termination value is the market value when you make the decision.
If a person dies, and a depreciating asset starts to be held by their legal personal representative (such as the executor of their estate), a balancing adjustment event occurs. The termination value of the asset is its adjustable value on the day the holder died. If they had allocated the asset to a low-value pool, the termination value is the amount of the closing balance of the pool for the income year in which the holder died that is reasonably attributable to the asset; see Low-value pools.
If the asset passes directly to a beneficiary of their estate or to a surviving joint tenant, the termination value is the asset's market value on the day the holder died.
Depreciating asset used for a non-taxable purpose
If a depreciating asset is used both for a taxable purpose and for a non-taxable purpose, the balancing adjustment amount must be reduced by the amount that is attributable to the use for a non-taxable purpose. In addition, a capital gain or capital loss may arise under the capital gain and capital loss provisions. The amount of the capital gain or capital loss is the difference between the asset's cost and its termination value that is attributable to the use for a non-taxable purpose.
For depreciating assets that are used wholly for a non-taxable purpose, the balancing adjustment amount is reduced to zero. The difference between the asset's termination value and its cost can be a capital gain or capital loss.
For some depreciating assets, any capital gain or capital loss arising will be disregarded even though the asset is used for a non-taxable purpose. These assets include:
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- cars that are designed to carry a load of less than one tonne and fewer than 9 passengers
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- motorcycles
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- valour or brave conduct decorations awarded
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- a collectable (such as a painting or an antique) if the first element of its cost is $500 or less
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- assets for which you can deduct an amount for the decline in value as a small business entity under the simplified depreciation rules for the income year in which the balancing adjustment event occurred
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- assets acquired before 20 September 1985
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- assets used solely to produce exempt income.
In addition, a capital gain arising from the disposal of a personal use asset (an asset used or kept mainly for personal use or enjoyment) of which the first element of cost is $10,000 or less is disregarded for CGT purposes. A capital loss arising from the disposal of any personal use asset is also disregarded for CGT purposes.
Example: depreciating asset used partly for a taxable purpose – balancing adjustment and capital loss
Andrew sells a computer for $600. It was new when he bought it for $1,000. It has been used 40% of the time for private purposes. At the time of its sale, the computer's adjustable value is $700.
Andrew can claim a deduction of $60. This is 60% (the proportion of use for a taxable purpose) of the balancing adjustment amount of $100 (being the difference between the computer's termination value of $600 and its adjustable value of $700 at the time of its sale).
In addition, a capital loss of $160 arises. This is 40% (the proportion of use for a non-taxable purpose) of $400, being the difference between the computer's termination value of $600 and its cost of $1000.
This example ignores any GST impacts.
If a balancing adjustment event occurs for a depreciating asset that is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced (see Decline in value of leisure facilities and Decline in value of boats) the balancing adjustment amount is reduced to the extent your deductions for decline in value were reduced. In addition, a capital gain or capital loss may arise in respect of the difference between the asset's cost and its termination value that is attributable to the reduction.
These rules are similar to those for working out the balancing adjustment amount for a depreciating asset used for a non-taxable purpose.
Balancing adjustment rules for second-hand depreciating assets in residential rental properties
If a depreciating asset is a second-hand depreciating asset in your residential rental property and your deductions for the decline in value of that asset have been reduced, the balancing adjustment amount must be reduced to account for the proportion you have not been able to deduct. In addition, a capital gain or a capital loss may arise under the capital gain or capital loss provisions.
These rules are similar to those for working out the balancing adjustment amount for a depreciating asset used for a non-taxable purpose.
For more information, see Rental properties 2024.
Plant acquired before 21 September 1999 and other depreciating assets acquired before 1 July 2001
Any assessable balancing adjustment amount or capital gain (if the asset was used for a non-taxable purpose) may be reduced if a balancing adjustment event occurs for:
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- an item of plant that was acquired before 11:45am AEST on 21 September 1999, or
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- a depreciating asset acquired before 1 July 2001 that is not plant.
The amount of the reduction is the cost base of the asset for CGT purposes less its cost. The purpose of this reduction is to preserve CGT cost base advantages for assets acquired before these dates.
One reason that the cost base might exceed the cost is indexation of the cost base. There is indexation of the cost base to 30 September 1999 where:
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- a CGT event happens to an asset acquired before 1145am AEST on 21 September 1999, and
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- the asset was owned for 12 months or more.
Indexation is not available for assets for which capital gains and capital losses are disregarded; for a list of such assets, see Depreciating asset used for a non-taxable purpose.
However, the balancing adjustment amount is reduced if the asset is:
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- a car that is designed to carry a load of less than one tonne and fewer than 9 passengers
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- a motor cycle
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- a valour decoration
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- a collectable (such as a painting or an antique) if the first element of its cost is $500 or less
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- an asset acquired before 20 September 1985, or
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- an asset used solely to produce exempt income.
In these cases, the balancing adjustment amount is reduced by the difference between the asset's termination value and its cost that is attributable to the use of the asset for a taxable purpose.
For more information on indexation of a cost base and the impact of indexation on discount capital gains, see Guide to capital gains tax 2024.
Balancing adjustment rules for cars
If a balancing adjustment event occurs for your car, you need to work out any balancing adjustment amount. Special rules apply to the calculation of balancing adjustment amounts for cars.
If a balancing adjustment event occurs for a car you used for a non-taxable purpose, you disregard any capital gain or capital loss.
There are only 2 methods of calculating work-related car expenses. You may choose the method which in your view, best captures the running costs of your vehicle. The methods are:
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- the cents per kilometre method
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- the logbook method.
For 2023–24, the cents per kilometre method:
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- applies for up to 5,000 business kilometres travelled
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- has a rate of 85 cents per kilometre for cars – we review the rate at the start of each income year.
If you use the logbook method of claiming car expenses, your balancing adjustment amount needs to be reduced by the amount that is attributable to the use of the car for a non-taxable purpose.
Example: using the logbook method, ignoring any GST impact
Louise acquired a car on 1 July 2022. During both 2022–23 and 2023–24, Louise used the logbook method to work out her deductions for car expenses. She sold her car for $24,500 on 30 June 2024. At that time, the adjustable value of the car was $18,200.
If Louise's logbook showed that the level of her business use was 40%, her balancing adjustment amount would be $2,520. This is 40% of the difference between the termination value and the adjustable value of the car ($6,300 × 40% = $2,520). Louise must include the amount of $2,520 in her assessable income.
If you have only used the cents per kilometre method of claiming car expenses, no balancing adjustment amount arises. This is because the decline in value of the car is already taken into account as part of the calculation of the car expenses.
However, you may need to include a balancing adjustment amount in your assessable income or claim a deduction in relation to that amount for a balancing adjustment event, which occurs at or after the start of 2023–24 if:
- •
- you switched between the cents per kilometre method and the logbook method of claiming car expenses before 1 July 2023
- •
- you owned a car before 1 July 2015 and you used the former 'one third of actual expenses' method or the '12% of original value' method for claiming car expense deductions for one or more years.
If you switched from the '12% of original value' method to the 'cents per kilometre' method, you will not need to make a balancing adjustment.
The above circumstances are only expected to occur in a limited number of cases. If you are affected and you are unsure of how to work out your balancing adjustment amount, contact us or your recognised tax adviser.
For a car subject to the car limit (see Car limit) you need to reduce the termination value. You multiply the termination value by the following fraction:
(car limit + amounts included in the car's second element of cost) ÷ total cost of car
where the total cost of the car is the sum of the first and second elements of cost, ignoring the car limit and after any adjustments for input tax credits; see GST input tax credits. You use the reduced termination value to work out your balancing adjustment amount for the car.
If a car was acquired at a discount and the cost of the car was increased by a discount portion, the termination value of the car must also be increased by that discount portion; see Car acquired at a discount.
If you are a lessee under a luxury car lease or a hirer under a hire purchase agreement and you don't acquire the car when the lease or agreement terminates or ends, you are treated as if you had sold the asset to the lessor or financier, respectively. You will need to work out any assessable or deductible balancing adjustment amount.
Involuntary disposal of a depreciating asset
An involuntary disposal occurs if a depreciating asset is:
- •
- lost or destroyed
- •
- compulsorily acquired by an Australian government agency
- •
- compulsorily acquired by another entity (other than a foreign government agency)
- •
- disposed of to an entity (other than a foreign government agency) after they served a notice on you inviting you to negotiate a sale agreement. They must have informed you that, if negotiations are unsuccessful, the asset will be compulsorily acquired either under an Australian law, other than chapter 6A of the Corporations Act 2001 or under a foreign law, other than the equivalent of chapter 6A of the Corporations Act 2001
- •
- fixed to land that is disposed of to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land and the lease significantly affected (or would have significantly affected) your use of the land, and the entity to which you disposed of the land is the lessee.
You may offset an assessable balancing adjustment amount arising from an involuntary disposal against the cost of one or more replacement assets. If you offset an amount against the cost of a replacement asset for an income year after the one in which the replacement asset's start time occurs, you must also reduce the sum of its opening adjustable value plus any second elements of its cost for that later year.
You must incur the expenditure on the replacement asset, or start to hold it, no earlier than one year before the involuntary disposal and no later than one year after the end of the income year in which that disposal occurred.
The Commissioner can agree to extend the time limit, for example, if it is unlikely that insurance claims for the disposal of the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claims settled.
To offset the assessable balancing adjustment amount, the replacement asset must be wholly used, or installed ready for use, by you for a taxable purpose at the end of the income year in which you incurred the expenditure on the asset or you started to hold it, and you must be able to deduct an amount for it.
If rollover relief is available under UCA, no balancing adjustment amount arises when a balancing adjustment event occurs for a depreciating asset. In some cases, rollover relief is automatic, for example, transfers pursuant to a court order following a marriage breakdown.
In some cases, rollover relief must be chosen. If the event arises from a change in the holding of, or in interests in, a partnership asset such as a variation in the constitution of a partnership or in a partnership interest, the transferor and the transferee must jointly choose the rollover relief.
Rollover relief may be available if you cease to hold a vessel covered by a certificate issued under Part 2 of the Shipping Reform (Tax Incentives) Act 2012. If the available relief is chosen, only the balancing adjustment amount that exceeds the cost of acquiring another certified vessel is included in assessable income.
When rollover relief applies, the transferee of the depreciating asset can claim deductions for the asset's decline in value as if there had been no change in holding.
The transferee must use the same method that the transferor used to work out the decline in value of the asset.
If the transferor used the diminishing value method, the transferee must also use the same effective life that the transferor was using.
If the transferor used the prime cost method, the transferee must replace the asset's effective life in the prime cost formula with the asset's remaining effective life, that is, any period of the asset's effective life that is yet to elapse when the transferor stopped holding the asset.
The first element of cost for the transferee is the adjustable value of the asset when it was held by the transferor just before the balancing adjustment event occurred.
There are specific record-keeping requirements for rollover relief; see Record keeping for rollover relief.
The roll-over relief under UCA has been available since 1 July 2007 to small business entities that choose to claim their capital allowance deductions under the simplified depreciation rules; see Small business entity concessions.
Interest realignment arrangements
You may choose to apply rollover relief to interest realignment arrangements where the taxpayer's original interest in the mining, quarrying or prospecting right was acquired after 1 July 2001. An interest realignment arrangement is an arrangement that involves 2 or more parties that each hold mining, quarrying or prospecting rights that relate to a common development project the parties propose to undertake jointly. The effect of the arrangement must be to align the interests that each party has in each right with their interest in the common development project.
If the available relief is chosen, the effect of the rollover is that a standard balancing adjustment does not occur. The adjustable value of the taxpayer's original right disposed of under the arrangement is transferred to the cost of the new right the same taxpayer received.
Limited recourse debt arrangements
Include excessive deductions for capital allowances as assessable income if expenditure on a depreciating asset is financed or refinanced wholly or partly by limited recourse debt (including a notional loan under certain hire purchase or instalment sale agreements of goods). This will occur where the limited recourse debt terminates but has not been paid in full by the debtor. Because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply to work out whether the debt has been fully paid.
If you are not sure what constitutes a limited recourse debt or how to work out your adjustment to assessable income, contact us or your recognised tax adviser.
Split or merged depreciating assets
If you hold a depreciating asset that is split into 2 or more assets, or a depreciating asset that is merged into another depreciating asset, you are taken to have stopped holding the original depreciating asset and to have started holding the split or merged asset. However, a balancing adjustment event does not occur just because depreciating assets are split or merged.
For example, removing a CB radio from a truck splits a depreciating asset. If you install the radio in another truck you may be merging the 2 assets (radio and truck).
After depreciating assets are split or merged, each new asset must satisfy the definition of a depreciating asset if UCA are to apply to it. For each depreciating asset you start to hold, you need to establish the effective life and cost.
The first element of cost for each of the split or merged depreciating assets is:
- •
- a reasonable proportion of the adjustable value of the original asset just before the split or merger, and
- •
- the same proportion of any costs of the split or merger.
If a balancing adjustment event occurs to a merged or split depreciating asset (for example, if it is sold) the balancing adjustment amount is reduced:
- •
- to the extent the asset has been used for a non-taxable purpose
- •
- by any amount of the original depreciating asset that is reasonably attributable to use for a non-taxable purpose of the original depreciating asset before the split or merger.
This reduction is not required if the depreciating asset is mining, quarrying or prospecting rights or information, provided certain activity tests are satisfied.
Foreign currency gains and losses
If you sell a depreciating asset in foreign currency, the termination value of the asset is converted to Australian currency at the exchange rate applicable when you stopped holding the asset. Under the forex provisions, you may make a foreign currency gain or loss if the Australian dollar value of the foreign currency when received differs from the Australian dollar value of the termination value. Any realised foreign currency gain or loss on the transaction is included in assessable income or allowed as a deduction, respectively.
If the TOFA rules apply to you, then the method that you use to calculate your foreign currency gain or loss may differ.
For more information on the TOFA rules, see Guide to the taxation of financial arrangements (TOFA).
Low-value pools
About low value pools, when you can allocate depreciating assets and how to work out the decline in value.
On this page
- •
- What are low-value pools
- •
- Allocating depreciating assets to a low-value pool
- •
- Working out the decline in value of depreciating assets in a low-value pool
- •
- Balancing adjustment event for a depreciating asset in a low-value pool
The decline in value of certain depreciating assets can be worked out through a low-value pool.
Low-value pools established before 1 July 2001 continue and are treated as if they were established under UCA. Use the closing balance of the pool worked out under the former rules to start working out the decline in value of the depreciating assets in the pool under UCA.
Under UCA, you can allocate low-cost assets and low-value assets to a low-value pool.
A low-cost asset is a depreciating asset whose cost is less than $1,000 (after GST credits or adjustments) at the end of the income year in which you started to use it, or had it installed ready for use, for a taxable purpose.
A low-value asset is a depreciating asset:
- •
- that is not a low-cost asset
- •
- that has an opening adjustable value for the current year of less than $1,000 (worked out using the diminishing value method), and
- •
- for which you used the diminishing value method to work out any deductions for decline in value for a previous income year.
Work out the decline in value of an asset (that you hold jointly with others) on the cost of your interest in the asset. This means that you can allocate your interest in the asset to your low-value pool if the cost of your interest in the asset, or the opening adjustable value of your interest, is less than $1,000. See Jointly held depreciating assets.
You cannot allocate the following depreciating assets to a low-value pool:
- •
- assets for which you used the prime cost method to work out any deductions for decline in value for a previous income year
- •
- horticultural plants
- •
- assets for which you deduct amounts under the simplified depreciation rules; see Small business entity concessions
- •
- assets that cost $300 or less and are used to earn income other than from a business (for which you can claim an immediate deduction); see Immediate deduction for certain non-business depreciating assets (costing $300 or less)
- •
- assets that you either use, or have used, in carrying on research and development activities for which you are entitled to a tax offset for a deduction in their decline in value, and your entitlement to that tax offset is worked out under Division 355 of the ITAA 1997
- •
- portable electronic devices, computer software, protective clothing, briefcases and tools of trade, if the item was provided to you by your employer, or some or all of the cost of the item was paid for or reimbursed by your employer, and the provision, payment or reimbursement was exempt from fringe benefits tax. (Portable electronic devices include laptops, portable printers, personal digital assistants, calculators, mobile phones and portable GPS navigation receivers.)
From 1 July 2017, special rules apply to certain second-hand depreciating assets in residential rental premises. For information on how the rules for low-value pools apply to these assets, see Rental properties 2024.
Allocating depreciating assets to a low-value pool
You establish a low-value pool the first time you choose to allocate a low-cost or low-value asset to the pool.
When you allocate an asset to the pool, you must make a reasonable estimate of the percentage of your use of the asset that will be for a taxable purpose over its effective life (for a low-cost asset) or the effective life remaining at the start of the income year for which it was allocated to the pool (for a low-value asset). This percentage is known as the asset's 'taxable use percentage'.
It is this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.
Example: working out the taxable use percentage
Kate allocates a low-cost asset to a low-value pool. The asset has an effective life of 3 years. Kate intends to use the asset 90% for taxable purposes in the first year, 80% in the second year and 70% in the third year. A reasonable estimation of the taxable use percentage would be the average of these estimates, that is, 80%.
Once you have allocated an asset to the pool, you cannot vary your estimate of the taxable use percentage even if the actual use of the asset turns out to be different from your estimate.
Once you choose to create a low-value pool and a low-cost asset is allocated to the pool, you must pool all other low-cost assets that you start to hold in that income year and in later income years. However, this rule does not apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.
Once you have allocated an asset to the pool, it remains in the pool.
Working out the decline in value of depreciating assets in a low-value pool
Once you allocate an asset to a low-value pool, it is not necessary to work out its adjustable value or decline in value separately. Only one annual calculation for the decline in value for all of the depreciating assets in the pool is required.
You work out the deduction for the decline in value of depreciating assets in a low-value pool using a diminishing value rate of 37.5%.
For the income year in which you allocate a low-cost asset to the pool you work out its decline in value at a rate of 18.75% or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year. This eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool.
To work out the decline in value of the depreciating assets in a low-value pool, add:
- •
- 18.75% of
- -
- the taxable use percentage of the cost (first and second elements) of low-cost assets you have allocated to the pool for the income year, and
- -
- the taxable use percentage of any amounts included in the second element of cost for the income year of
- •
- all assets in the pool at the end of the previous income year, and
- •
- low-value assets allocated to the pool for the income year,
You then add
- •
- 37.5% of
- -
- the closing pool balance for the previous income year, and
- -
- the taxable use percentage of the opening adjustable value of any low-value assets allocated to the pool for the income year.
Example: working out the decline in value of depreciating assets in a low-value pool, ignoring any GST impact
During 2023–24, John bought a printer for $990.
As John had allocated low-cost assets to a low-value pool in 2022–23, he had to allocate the printer to the pool because the printer was a low-cost asset. He estimated that he would use the printer 60% for taxable purposes. He therefore allocated 60% of the cost of the printer to the pool, that is, $594.
At the end of 2022–23, John's low-value pool had a closing pool balance of $5,000. In 2023–24, he did not allocate low-cost or low-value assets to the pool other than the printer.
John's deduction for the decline in value of the assets in the pool for 2023–24 is $1,986 worked out as follows:
18.75% of the taxable use percentage of the cost of the printer allocated to the pool during 2023–24
(18.75% × $594)$111 plus 37.5% of the closing pool balance for 2022–23
(37.5% × $5,000)$1,875
The closing balance of a low-value pool for 2023–24 is:
- •
- the closing pool balance for 2022–23
plus
- •
- the taxable use percentage of the cost (first and second elements) of any low-cost assets allocated to the pool in 2023–24
plus
- •
- the taxable use percentage of the opening adjustable value of low-value assets allocated to the pool in 2023–24
plus
- •
- the taxable use percentage of any amounts included in 2023–24 in the second element of cost of
- -
- assets in the pool at the end of 2022–23, and
- -
- low-value assets allocated in 2023–24
less
- •
- the decline in value of the assets in the pool in 2023–24.
Example: working out the closing balance of a low-value pool, ignoring any GST impact
Following on from the previous example, the closing balance of the pool for 2023–24 is $3,608:
- •
closing pool balance for 2022–23 $5,000
- •
add the taxable percentage of the cost of the printer $594
- •
subtract the decline in value of the assets in the pool for 2022–24 $1,986
Balancing adjustment event for a depreciating asset in a low-value pool
If a balancing adjustment event occurs for a depreciating asset in a low-value pool, you reduce the amount of the closing pool balance for that income year by the taxable use percentage of the asset's termination value. If the taxable use percentage of the asset's termination value exceeds the closing pool balance, you reduce the closing pool balance to zero and include the excess in your assessable income.
A capital gain or capital loss may arise if the asset is not used wholly for a taxable purpose. The difference between the asset's cost and its termination value that is attributable to the estimated use for a non-taxable purpose is treated as a capital gain or capital loss.
Example: disposal of a depreciating asset in a low-value pool, ignoring any GST impact
Following on from the previous examples, during 2024–25 John sells the printer for $500. Because he originally estimated that the printer would only be used 60% for taxable purposes, the closing balance of the pool is reduced by 60% of the termination value of $500, that is, $300.
A capital loss of $196 also arises. As the printer's taxable use percentage is 60%, 40% of the difference between the asset's cost ($990) and its termination value ($500) is treated as a capital loss.
Assuming that John made no additional allocations to or reductions from his low-value pool, the closing balance of the pool for 2024–25 is $1,955:
- •
closing pool balance for 2023–24 $3,608
- •
subtract the decline in value of the assets in the pool for the year 37.5% × $3,608 = $1,353
- •
subtract the taxable use percentage of the termination value of pooled assets that were disposed of during the year $300
This guide includes a worksheet to help you work out your deductions for depreciating assets in a low-value pool.
In-house software
About in-house software and claiming a decline in value deduction under UCA.
On this page
In-house software is computer software, or a right (for example, a licence) to use computer software, that you acquire or develop (or have another entity develop):
- •
- that is mainly for your use in performing the functions for which it was developed, and
- •
- for which no amount is deductible outside UCA or the simplified depreciation rules for small business entities.
If expenditure on software is deductible under the ordinary deduction provisions of the income tax law, the software is not in-house software. A deduction for such expenditure is allowable in the income year in which it is incurred.
Expenditure to develop software for exploitation of the copyright is not in-house software. The copyright is intellectual property, which is a depreciating asset, and the decline in value would be calculated using the prime cost method and an effective life that is either 25 years or the copyright period, whichever is shorter.
Under UCA, expenditure on in-house software may be deducted using the prime cost method in the following ways.
- •
- The decline in value of acquired in-house software, such as off-the-shelf software, is worked out using an effective life of
- -
- 4 years (if you started to hold the in-house software under a contract entered into after 7:30 pm AEST on 13 May 2008 or otherwise started to hold it after that day), or
- -
- 5 years (if the in-house software is first used or first installed ready for use on or after 1 July 2015).
- •
- Expenditure incurred in developing (or having developed) in-house software may be (or may need to be) allocated to a software development pool.
- •
- If expenditure incurred in developing (or having another entity develop) in-house software is not allocated to a software development pool, it can be capitalised into the cost of a resulting unit of in-house software. Its decline in value can then be worked out under the prime cost method, from the time the software is first used or first installed ready for use, using an effective life of
- -
- 4 years (if the development started after 7:30 pm AEST on 13 May 2008), or
- -
- 5 years (if the in-house software is first used or first installed ready for use on or after 1 July 2015).
- •
- If in-house software costs $300 or less and it is used mainly for producing non-business assessable income, an immediate deduction may be allowable, see Immediate deduction for certain non-business depreciating assets (costing $300 or less).
The termination value of in-house software that you still hold but stop using and expect never to use again, or have not used and decide never to use, is zero. As a result, you can claim an immediate deduction for the adjustable value (or if it has not been used, the cost) of the software at that time.
You can also claim an immediate deduction for expenditure incurred on an in-house software development project (not allocated to a software development pool) if you have not used the software or had it installed ready for use and decide that you will never use it or have it installed ready for use. The amount you can deduct is your total expenditure on the software less any amount you derive for the software or a part of it. Your deduction is limited to the extent that, when you incurred the expenditure, you intended to use the software, or have it installed ready for use, for a taxable purpose.
For information on the deductibility of website expenses, see Taxation Ruling Taxation ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website.
Under UCA, you can choose to allocate to a software development pool expenditure that you incur on developing (or on having developed) in-house software that you intend to use solely for a taxable purpose. Once you allocate expenditure on such in-house software to a pool, you must allocate all such expenditure incurred in that year or a later year to a software development pool. A different pool is created for each income year in which you incur expenditure on developing (or on having developed) in-house software.
Expenditure on developing in-house software that you don't intend to use solely for a taxable purpose and expenditure on acquiring in-house software cannot be allocated to a software development pool.
If you are entitled to claim a GST input tax credit for expenditure allocated to a software development pool, the expenditure in the pool for the income year in which you are entitled to the credit is reduced by the amount of the credit. Certain adjustments under the GST legislation for expenditure allocated to a software development pool are treated as an outright deduction or income. Other adjustments reduce or increase the amount of the expenditure that has been allocated to the pool for the adjustment year.
You don't get any deduction for expenditure in a software development pool in the income year in which you incur it. For expenditure incurred in an income year starting on or after 1 July 2015, you are allowed deductions at the rate of 30% in each of the next 3 years and 10% in the year after that.
If you have allocated software development expenditure on a project to a software development pool and the project is abandoned, the expenditure remains to be deducted as part of the pool.
If you have pooled in-house software development expenditure and you receive consideration for the software (for example, insurance proceeds on the destruction of the software), you must include that amount in your assessable income unless you make the choice for rollover relief to apply and do so. Choice of rollover relief is only available in this context where a change occurs in the holding of, or of interests in, the software; see Rollover relief.
You must also include any recoupment of the expenditure in your assessable income.
If the receipt of consideration arises from a non-arm's length dealing and the amount is less than the market value of what the receipt was for, you are taken to receive that market value instead.
Depreciating assets and taxation of financial arrangements (TOFA)
When the taxation of financial arrangements rules apply to you and your depreciating assets.
On this page
- •
- When do the TOFA rules start to apply to you?
- •
- Do the TOFA rules apply to you?
- •
- TOFA rules and UCA
- •
- TOFA and the cost of a depreciating asset
- •
- TOFA and the termination value of a depreciating asset
When do the TOFA rules start to apply to you?
The key provisions of the TOFA rules are found in Division 230 of the ITAA 1997.
If the TOFA rules apply to you, they apply to the financial arrangements that you start to have from the beginning of your income year commencing on or after 1 July 2010 (unless you elected for the rules to apply a year earlier).
Do the TOFA rules apply to you?
The TOFA rules apply to you if you are:
- •
- an authorised deposit-taking institution, securitisation vehicle or financial sector entity with an aggregated annual turnover of $20 million or more
- •
- a superannuation entity, approved deposit fund, pooled superannuation fund, managed investment scheme or entity with a similar status under foreign law relating to foreign regulation, with assets of $100 million or more
- •
- any other entity (other than an individual) which satisfies one or more of the following
- -
- an aggregated turnover of $100 million or more
- -
- assets of $300 million or more
- -
- financial assets of $100 million or more.
If you don't meet these requirements, you can elect to have the TOFA rules apply to you.
The TOFA rules contain interaction provisions which may modify the cost and termination value of a depreciating asset acquired by an entity to which the TOFA rules apply. This will be the case where payment (or a substantial proportion of the payment) is deferred for more than 12 months after delivery of the depreciating asset.
For more information, see:
- •
- TOFA and the cost of a depreciating asset
- •
- TOFA and the termination value of a depreciating asset
- •
- Guide to the taxation of financial arrangements (TOFA).
TOFA and the cost of a depreciating asset
If the TOFA rules apply to you and you start or cease to have a financial arrangement (or part of a financial arrangement) as consideration for acquiring a depreciating asset, the TOFA rules will operate to determine the first element of cost. In general the rules mean the first element of cost is the market value of the depreciating asset at the time of acquisition.
In the same way, the TOFA rules can also affect the second element of a depreciating asset's cost when the financial arrangement is consideration for something obtained which is relevant to the second element of cost, for example, capital improvements.
Example: TOFA and the cost of a depreciating asset
Aus Co is subject to the TOFA rules.
Aus Co enters into a contract on 1 July 2023 to buy a depreciating asset for $100,000. The depreciating asset is delivered on 1 January 2024 and payment is made on 1 July 2025 (that is, 18 months after delivery). The market value of the depreciating asset on 1 January 2024 is $90,000.
On 1 January 2024 when Aus Co receives the depreciating asset, it starts to have a financial arrangement (the obligation to pay $100,000 in 18 months) which is provided to acquire the depreciating asset.
The TOFA rules mean that Aus Co is taken to have provided an amount equal to the market value of the depreciating asset (worked out at the time it is acquired) for its acquisition. Therefore, Aus Co's first element of cost of the depreciating asset is $90,000.
The financial arrangement is taxed separately under the TOFA rules. The gain or loss worked out under the TOFA rules (loss of $10,000 in this example) does not form part of the first element of cost of the depreciating asset.
The TOFA rules also provide for a hedging tax-timing method that allows gains and losses from certain hedging financial arrangements to be recognised and characterised in accordance with the tax treatment of the underlying item being hedged. For example, if this method applies to a gain or loss on a hedging financial arrangement used to hedge against risks for a depreciating asset, the gain or loss will be assessable or deductible on the same basis as the decline in value deduction.
Note however that the gain or loss on the hedging financial arrangement will not form part of the cost of the depreciating asset.
TOFA and the termination value of a depreciating asset
If the TOFA rules apply to you and you start or cease to have a financial arrangement (or part of a financial arrangement) as consideration for providing a depreciating asset, the TOFA rules will determine the termination value of the depreciating asset. In general the rules mean the termination value is the market value of the depreciating asset at the time of disposal.
Example: TOFA and the termination value of a depreciating asset
ABC Co is subject to the TOFA rules.
ABC Co enters into a contract on 1 July 2023 to sell its depreciating asset for $100,000. The depreciating asset is delivered on 1 January 2024 and payment is received on 1 July 2025 (that is, 18 months after delivery). The market value of the depreciating asset on 1 January 2024 is $90,000.
On 1 January 2024 when ABC Co delivers the depreciating asset it will start to have a financial arrangement (the right to receive $100,000 in 18 months which is received for the provision of the depreciating asset).
The TOFA rules mean that ABC Co is taken to have received an amount equal to the market value of the depreciating asset (worked out at the time it is provided) for its disposal. Therefore, ABC Co's termination value for the depreciating asset will be $90,000.
The financial arrangement is taxed separately under the TOFA rules. The gain or loss worked out under the TOFA rules (gain of $10,000 in this example) does not form part of the termination value of the depreciating asset.
The TOFA rules also provide for a hedging tax-timing method that allows gains and losses from certain hedging financial arrangements to be recognised and characterised in accordance with the tax treatment of the underlying item being hedged. For example, if this method applies to a gain or loss on a hedging financial arrangement used to hedge risks for a depreciating asset, the gain will be assessable (or the loss deductible) on the same basis as for the depreciating asset. Therefore, when there is a balancing adjustment event for that depreciating asset, you may have to work out separately:
- •
- the balancing adjustment assessable or deductible amount on the depreciating asset, and
- •
- the assessable or deductible amount for any part of the gain or loss on the hedging financial arrangement under the TOFA rules that has not yet been assessed or deducted.
The gain or loss on the hedging financial arrangement will not form part of the termination value of the depreciating asset.
Primary production depreciating assets
Depreciating assets used in primary production and the special rules for working out the decline in value.
On this page
- •
- Depreciating assets used in primary production
- •
- Water facilities
- •
- Fencing assets
- •
- Fodder storage assets
- •
- Horticultural plants (including grapevines)
Depreciating assets used in primary production
The general principles of UCA apply to most depreciating assets used in primary production.
However, the decline in value of the following primary production depreciating assets is worked out using special rules:
- •
- water facilities used to conserve or convey water
- •
- fencing assets
- •
- fodder storage assets, and
- •
- horticultural plants (including grapevines).
For depreciating assets deductible under these special rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less (although some are immediately deductible regardless of cost).
Deductions for these assets are not available to a partnership. Costs incurred by a partnership are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.
There are no specific balancing adjustment rules for these depreciating assets. However, the assets may be considered part of the land for CGT purposes.
When the land is disposed of, any deductions you have claimed, or can claim, for the assets may reduce the cost base of the land. For more information, see Guide to capital gains tax 2024.
Primary producers may also be able to claim deductions for capital expenditure on landcare operations, electricity connections and phone lines; see Landcare operations and Electricity connections and phone lines.
A water facility is either:
- •
- a plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water, including a repair of a capital nature, an alteration, addition or extension to that plant or structural improvement
- •
- a structural improvement that is reasonably incidental to conserving or conveying water, including a repair of a capital nature, addition or extension to that structural improvement.
Examples of water facilities are dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills. Examples of structural improvements that are reasonably incidental to conserving or conveying water are a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road) and a fence preventing livestock entering an irrigation channel.
You can fully deduct capital expenditure on a water facility if you incurred the expenditure at or after 7:30 pm AEST on 12 May 2015. You fully deduct the expenditure in the income year in which you incurred it. The total deduction cannot be more than the amount of the capital expenditure.
Unless you are an irrigation water provider, the expenditure must be incurred by you primarily and principally for conserving or conveying water for use in a primary production business that you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land. Your deduction is reduced where the water facility is not wholly used for either:
- •
- carrying on a primary production business on land in Australia, or
- •
- a taxable purpose.
An irrigation water provider is an entity whose business is primarily and principally the supply of water to entities for use in primary production businesses on land in Australia. The supply of water by the use of a motor vehicle is excluded.
If you are an irrigation water provider, you must incur the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia (being entities supplied with water by you). Your deduction is reduced if the water facility is not used wholly for a taxable purpose.
If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
No deduction is available for capital expenditure incurred on acquiring a second-hand commercial water facility unless you can show that no one else has deducted or could deduct an amount for earlier capital expenditure on the construction, manufacture or previous acquisition of the water facility.
If you are a primary producer and a small business entity, you can choose to work out your deductions for water facilities under either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.
You may need to include a recoupment of expenditure on water facilities in your assessable income. If the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a water facility for its market value is not regarded as an assessable recoupment.
A fencing asset is an asset or structural improvement that is a fence, or a repair of a capital nature, or an alteration, addition or extension, to a fence. The capital expenditure you incur on the construction, manufacture, installation or acquisition of the fencing asset must have been incurred primarily and principally in a primary production business that you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.
The term 'fence' takes its ordinary meaning and includes an enclosure or barrier, usually of metal or wood, as around or along a field or paddock. The term 'fence' extends to parts or components of a fence including, but not limited to, posts, rails, wire, droppers, gates, fittings and anchor assemblies.
You can fully deduct capital expenditure on a fencing asset in the income year in which you incurred the expenditure, so expenditure incurred in 2023–24 is fully deductible in 2023–24. The total deduction cannot be more than the amount of the capital expenditure.
If you incurred the expenditure before 7:30 pm AEST on 12 May 2015, the previous UCA that allow you to deduct the capital expenditure on a fencing asset over the effective life of the asset continue to apply.
In addition, you cannot deduct an amount for capital expenditure on a fencing asset if the fencing asset is a stockyard, pen or portable fence, or is a repair, alteration, addition or extension to a stockyard, pen or portable fence.
Your deduction is reduced where the fencing asset is not:
- •
- wholly used in carrying on a primary production business on land in Australia, or
- •
- wholly used for a taxable purpose, for example, for the purpose of producing assessable income.
This prevents primary producers from deducting expenditure on a fencing asset to the extent that the asset is used other than in carrying on their primary production business or for a taxable purpose.
If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
If you are a primary producer and a small business entity, you can choose to work out your deductions for fencing assets under either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.
You may need to include a recoupment of expenditure on fencing assets in your assessable income. If the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a fencing asset for its market value is not regarded as an assessable recoupment.
A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It is also a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to an asset or a structural improvement, that is primarily and principally for the purpose of storing fodder.
The capital expenditure you incur on the construction, manufacture, installation or acquisition of the fodder storage asset must have been incurred primarily and principally for use in a primary production business that you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.
For a fodder storage asset to satisfy the 'primarily and principally' test, its main purpose (other than some incidental or other minor purpose, but not necessarily the sole purpose) must be to store fodder. For example, if a shed was built for the purpose of storing hay but is occasionally used to store a neighbour's tractor when borrowed twice a year, the shed will be an asset that is primarily and principally for the purpose of storing fodder.
The term 'fodder' takes its ordinary meaning and refers to food for livestock. It is usually dried like grain, hay or silage but can include liquid feed supplements. Examples of typical fodder storage assets include:
- •
- silos
- •
- liquid feed supplement storage tanks
- •
- bins for storing dried grain
- •
- hay sheds
- •
- grain storage sheds, and
- •
- above-ground bunkers for silage.
If you incurred a capital expense on a fodder storage asset, you can immediately deduct the cost in the income year you incurred it, if the expense was incurred either:
- •
- on or after 19 August 2018, or
- •
- before 19 August 2018, but the asset was first used or installed ready for use on or after 19 August 2018.
If you incurred the capital expenditure after 7:30 pm AEST on 12 May 2015 but before 19 August 2018, and the asset was first used or installed ready for use before 19 August 2018, you deduct one-third of the expenditure in the income year in which the expenditure is incurred, and the same amount in each of the following 2 income years. The total deduction over the 3 income years cannot be more than the amount of the capital expenditure.
If you incurred the expenditure before this time, the previous UCA that allow you to deduct the capital expenditure on a fodder storage asset over the effective life of the asset continue to apply.
Your deduction is reduced in any income year where the fodder storage asset is not:
- •
- wholly used in carrying on a primary production business on land in Australia, or
- •
- wholly used for a taxable purpose, for example, for the purpose of producing assessable income.
This prevents primary producers from deducting expenditure on a fodder storage asset to the extent that the asset is used other than in carrying on their primary production business or for a taxable purpose.
No deduction is available for capital expenditure incurred to acquire a second-hand fodder storage asset unless you can show that no one else has deducted or could deduct an amount for earlier capital expenditure on the construction, manufacture or previous acquisition of the fodder storage asset.
If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
If you are a primary producer and a small business entity, you can choose to work out your deductions for fodder storage assets under either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.
You may need to include a recoupment of expenditure on fodder storage assets in your assessable income. If the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a fodder storage asset for its market value is not regarded as an assessable recoupment.
Horticultural plants (including grapevines)
A horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts.
You can claim a deduction for the decline in value of horticultural plants, provided:
- •
- you owned the plants (lessees and licensees of land are treated as if they own the horticultural plants on that land)
- •
- you used them in a business of horticulture to produce assessable income, and
- •
- the expense was incurred after 9 May 1995 (or for grapevines, on or after 1 October 2004).
Your deduction for the decline in value of horticultural plants is based on the capital expenditure incurred in establishing the plants. This does not include the cost of purchasing or leasing land, or expenditure in draining swamp or low-lying land or on clearing land. It would include, for example:
- •
- the costs of acquiring and planting seeds, and
- •
- part of the cost of ploughing, contouring, fertilising, stone removal and topsoil enhancement relating to the planting.
You cannot claim this deduction for forestry plants.
If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
The period over which you can deduct the expenditure depends on the effective life of the horticultural plant. You can choose to work out the effective life yourself or you can use the effective life determined by the Commissioner which is listed in TR 2022/1. If the effective life of the plant is less than 3 years, you can claim the establishment expenditure in full generally in the year in which the first commercial season starts.
If the effective life of the plant is 3 or more years, you can write off the establishment expenditure over the maximum write-off period, which generally begins at the start of what is expected to be the plant's first commercial season. If the plant is destroyed before the end of its effective life, you are allowed a deduction in that year for the remaining unclaimed establishment costs less any proceeds, for example, insurance payout.
| Effective life | Annual write-off rate
% |
Maximum write-off period |
|---|---|---|
| 3 to less than 5 years | 40 | 2 years 183 days |
| 5 to less than 6? years | 27 | 3 years 257 days |
| 6? to less than 10 years | 20 | 5 years |
| 10 to less than 13 years | 17 | 5 years 323 days |
| 13 to less than 30 years | 13 | 7 years 253 days |
| 30 years or more | 7 | 14 years 105 days |
Where ownership of the horticultural plants changes, the new owner is entitled to continue claiming the balance of capital expenditure they incurred in establishing the plants on the same basis.
If you are a primary producer and a small business entity, you must use UCA to work out your deductions for horticultural plants. For more information on the simplified depreciation rules, see Small business entity concessions.
You may need to include a recoupment of expenditure on horticultural plants in your assessable income. As the expenditure may be deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years. An amount received for the sale of a horticultural plant for its market value is not regarded as an assessable recoupment.
Capital expenditure deductible under UCA
When you can claim capital expenditure deductions under uniform capital allowances.
On this page
- •
- Deductible capital expenditure
- •
- Landcare operations
- •
- Electricity connections and phone lines
- •
- Environmental protection activities (EPA)
- •
- Mining and quarrying, and minerals transport
- •
- Project pools
- •
- Business related costs – section 40-880 deductions
- •
- Carbon sink forests
Deductible capital expenditure
The following types of capital expenditure are deductible under UCA:
- •
- landcare operations incurred by primary producers, other landholders and rural land irrigation water providers; see Landcare operations
- •
- electricity connections or phone lines incurred by primary producers and other landholders; see Electricity connections and phone lines
- •
- environmental protection activities (EPA); see Environmental protection activities (EPA)
- •
- exploration and prospecting; see Mining and quarrying, and minerals transport
- •
- rehabilitation of mining and quarrying sites; see Mining and quarrying, and minerals transport
- •
- petroleum resource rent tax; see Mining and quarrying, and minerals transport
- •
- certain capital expenditure directly connected with a project; see Project pools
- •
- expenditure incurred in establishing trees in a carbon sink forest; see Carbon sink forests
- •
- certain business-related costs; see Business related costs – section 40-880 deductions.
Generally, to work out your deductions you need to reduce the expenditure by the amount of any GST input tax credits you are entitled to claim for the expenditure. Increasing or decreasing adjustments that relate to the expenditure may be allowed as a deduction or included in assessable income, respectively. Special rules apply to input tax credits on expenditure allocated to a project pool; see Project pools.
Small business entities that have chosen to use the simplified depreciation rules (except primary producers) may deduct capital expenditure under these UCA only if the expenditure is not part of the cost of a depreciating asset. Primary producers that are using the simplified depreciation rules can choose to deduct certain depreciating assets under UCA; see Small business entity concessions.
You can claim a deduction in the year you incur capital expenditure on a landcare operation for land in Australia.
Unless you are a rural land irrigation water provider, the deduction is available to the extent you use the land for either:
- •
- a primary production business, or
- •
- in the case of rural land, carrying on a business for a taxable purpose from the use of that land, except a business of mining or quarrying.
You may claim the deduction even if you are only a lessee of the land.
A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by the use of a motor vehicle is excluded.
If you are a rural land irrigation water provider, you can claim a deduction for capital expenditure you incur on a landcare operation for:
- •
- land in Australia that other entities (being entities supplied with water by you) use at the time for carrying on primary production businesses, or
- •
- rural land in Australia that other entities (being entities supplied with water by you) use at the time for carrying on businesses for a taxable purpose from the use of that land (except a business of mining or quarrying).
A rural land irrigation water provider's deduction is reduced by a reasonable amount to reflect an entity's use of the land for a non-taxable purpose after the water provider incurred the expenditure.
A landcare operation is one of the following:
- 1.
- erecting fences to separate different land classes in accordance with an approved land management plan
- 2.
- erecting fences primarily and principally to keep animals out of areas affected by land degradation to prevent or limit further degradation and to help reclaim the areas
- 3.
- constructing a levee or similar improvement
- 4.
- constructing drainage works (other than the draining of swamp or low-lying land) primarily and principally to control salinity or assist in drainage control
- 5.
- an operation primarily and principally for eradicating or exterminating animal pests from the land
- 6.
- an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land
- 7.
- an operation primarily and principally for preventing or combating land degradation other than by erecting fences
- 8.
- an extension, alteration or addition to any of the assets described in 1, 2, 3 or 4 above or an extension of an operation described in 5, 6 or 7 above
- 9.
- a repair of a capital nature to an asset that is deductible under a landcare operation
- 10.
- constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation
- 11.
- a repair of a capital nature, or an alteration, addition or extension, to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible under a landcare operation.
An example of a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.
No deduction is available for landcare operations if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements. You work out the decline in value of plant not deductible under the landcare provisions using the general rules for working out decline in value; see Methods of working out decline in value.
There are no specific balancing adjustment rules for a depreciating asset on which capital expenditure has been incurred that is deductible under the landcare provisions. That asset may, however, be considered part of the land for CGT purposes.
If a levee is constructed primarily and principally for water conservation, it would be a water facility and no deduction would be allowable under these rules. You would need to work out its decline in value under the rules for water facilities; see Water facilities.
If you are a rural land irrigation water provider and you can deduct expenditure under both the water facilities and landcare operation rules, you can only deduct the expenditure as expenditure on a water facility.
You cannot deduct an amount for landcare operations if any entity can deduct an amount for that expenditure, in any income year, under the carbon sink forest rules; see Carbon sink forests. If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
A recoupment of the expenditure may be included in your assessable income.
The deduction is not available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.
Capital expenditure on a landcare operation may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for certain depreciating assets costing $300 or less.
If you incur the capital expenditure on a depreciating asset and you are a primary producer and a small business entity, you can choose to work out your deductions for these depreciating assets using either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.
Electricity connections and phone lines
You may be able to claim a deduction over 10 years for capital expenditure you incur on:
- •
- connecting mains electricity to land on which a business is carried on for a taxable purpose or upgrading an existing connection to that land, or
- •
- a telephone line on, or extending to, land on which a primary production business is carried on.
If the expenditure incurred arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
A recoupment of the expenditure may be included in your assessable income.
These deductions are not available to a partnership. Costs incurred by a partnership are allocated to each partner who can claim a deduction for their share of the relevant capital expenditure.
Such capital expenditure may be incurred on a depreciating asset. However, if the expenditure is deductible under these rules, you cannot use the general rules for working out decline in value or claim the immediate deduction for depreciating assets costing $300 or less.
If you incur the capital expenditure on a depreciating asset and you are a primary producer and a small business entity, you can choose to work out your deductions for these depreciating assets using either the simplified depreciation rules or these UCA rules. For more information on the simplified depreciation rules, see Small business entity concessions.
There are no specific balancing adjustment rules for a depreciating asset on which capital expenditure has been incurred that is deductible under these rules. That asset may, however, be considered part of the land for CGT purposes.
Environmental protection activities (EPA)
You can claim an immediate deduction for expenditure that you incur for the sole or dominant purpose of carrying on EPA. EPA are activities undertaken to prevent, fight and remedy pollution, and to treat, clean up, remove and store waste from your earning activity or a site on which another entity carried on a business that you acquired and carry on substantially unchanged as your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for one or more of these purposes:
- •
- producing assessable income (other than a net capital gain)
- •
- exploration or prospecting
- •
- mining site rehabilitation.
You may also claim a deduction for expenditure on EPA relating to a site if the pollution or waste is caused by another entity to which you have leased or granted a right to use the site.
The deduction is not available for:
- •
- EPA bonds and security deposits
- •
- expenditure on acquiring land
- •
- capital expenditure on constructing or altering buildings, structures or structural improvements
- •
- expenditure to the extent that you can deduct an amount for it under another provision.
Expenditure on EPA that is also for an environmental impact assessment of your project is not deductible as expenditure on EPA. However, if it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the project life; see Project pools.
Expenditure that forms part of the cost of a depreciating asset is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset.
A recoupment of the expenditure may be included in your assessable income.
Note that expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at a rate of 2.5% under the provisions for capital works expenditure.
Mining and quarrying, and minerals transport
Work out deductions for the decline in value of depreciating assets used in mining and quarrying, and in minerals transport using the general rules; see Working out decline in value. The general rules either don't apply or are modified for the depreciating assets or capital expenditure discussed below.
Immediate deduction for depreciating assets used in exploration or prospecting
The decline in value of certain depreciating assets that you first use for exploration or prospecting for minerals (including petroleum), or quarry materials, obtainable by activities carried on for the purpose of producing assessable income, can be its cost. This means you can deduct the cost of the asset in the year in which you start to use it for such activities to the extent that the asset is used for a taxable purpose.
However, where the depreciating asset is a mining, quarrying or prospecting right or mining, quarrying or prospecting information first used for exploration or prospecting for minerals (including petroleum) or quarry materials, an immediate deduction is only available for the asset if one of the following tests are also met:
- •
- The mining, quarrying or prospecting right or mining, quarrying or prospecting information has been acquired from an Australian Government agency or a government entity.
- •
- The mining, quarrying or prospecting information is a geophysical or geological data package you acquired from an entity which predominantly carries on a business of providing mining, quarrying or prospecting information to other entities.
- •
- You created the mining, quarrying or prospecting information or contributed to the cost of its creation.
- •
- You caused the mining, quarrying or prospecting information to be created or contributed to the cost of it being created by an entity which predominantly carries on a business of providing mining, quarrying or prospecting information to other entities.
If one of these tests is not met in respect of the mining, quarrying or prospecting right or mining, quarrying or prospecting information, then there is no immediate deduction of the cost of that asset and the effective life of the asset is the shorter of:
- •
- the effective life provided in the table, if one has been determined (see Effective life of intangible depreciating assets that are mining, quarrying or prospecting rights, or mining, quarrying or prospecting information), and
- •
- 15 years.
Immediate deduction for expenditure which does not form part of the cost of a depreciating asset
An immediate deduction is available for payments of petroleum resource rent tax and for expenditure that does not form part of the cost of a depreciating asset and is incurred on:
- •
- exploration or prospecting for minerals, including petroleum, or quarry materials, obtainable by activities carried on for the purpose of producing assessable income (see Taxation Ruling TR 2017/1 Income tax: deductions for mining and petroleum exploration expenditure), or
- •
- rehabilitation of your mining or quarrying sites.
If the expenditure arises from a non-arm's length dealing and is more than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
A recoupment of the expenditure may be included in assessable income.
A farm-in farm-out (FIFO) arrangement broadly involves an exchange of an interest in a mining, quarrying or prospecting right in return for an 'exploration benefit', usually an entitlement to receive exploration services or to have exploration expenditure funded by the other party. The tax treatment of FIFO arrangements, prior to amendments in 2014, is outlined in Miscellaneous Taxation Ruling MT 2012/1 and MT 2012/2. Further amendments in 2015 were necessary to ensure that FIFO arrangements did not have certain tax consequences where those consequences could impede genuine exploration activity.
Deduction over time for capital expenditure associated with projects you carry on
Expenditure incurred after 30 June 2001 which does not form part of the cost of a depreciating asset and is not otherwise deductible may be a project amount that you can allocate to a project pool for which deductions are available. To be a project amount, mining capital expenditure or transport capital expenditure must be directly connected with carrying on the mining operations or business, respectively.
Mining capital expenditure is capital expenditure you incur on:
- •
- carrying out eligible mining or quarrying operations
- •
- site preparation for those operations
- •
- necessary buildings and improvements for those operations
- •
- providing or contributing to the cost of providing water, light, power, access or communications to the site of those operations
- •
- buildings used directly for operating or maintaining plant for treating minerals or quarry materials
- •
- buildings and improvements for storing minerals or quarry materials before or after their treatment
- •
- certain housing and welfare (except for quarrying operations).
Transport capital expenditure includes capital expenditure on:
- •
- a railway, road, pipeline, port or other facility used principally for transporting minerals, quarry materials or processed minerals (other than wholly within the site of mining operations) or the transport of petroleum in certain circumstances
- •
- obtaining a right to construct or install such a facility
- •
- compensation for damage or loss caused by constructing or installing such a facility
- •
- earthworks, bridges, tunnels or cuttings necessary for such a facility
- •
- as part of carrying on your business, contributions you make to someone else's expenditure on the above items.
For information on how to work out deductions using a project pool, see Project pools.
Special transitional rules ensure that amounts of undeducted expenditure as at 30 June 2001 incurred under the former special provisions for the mining and quarrying and mineral transport industries remain deductible over the former statutory write-off periods, for example, over the lesser of 10 years or the life of the mine.
Similarly, the former statutory write-off continues to apply to expenditure you incurred after 30 June 2001 if:
- •
- it would have qualified for deduction under the former special provisions
and either:
- •
- it is a cost of a depreciating asset that you started to hold under a contract entered into before 1 July 2001 or otherwise started to hold or began to construct before that day, or
- •
- your expenditure was incurred under a contract entered into before 1 July 2001 and the expenditure does not relate to a depreciating asset.
Eligible exploration or prospecting expenditure incurred after 30 June 2001 that is a cost of a depreciating asset that you started to hold under a contract entered into before 1 July 2001, or otherwise started to hold or began to construct before that day, is deductible at the time it is incurred.
Under UCA, you can allocate to a project pool certain capital expenditure that is directly connected with a project you carry on (or propose to carry on) for a taxable purpose, and write it off over the project life. Each project has a separate project pool.
The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a 'project amount' is directly connected with the project.
A project is carried on if it involves some form of continuing activity. The holding of a passive investment such as a rental property would not represent sufficient continuing activity to constitute the carrying on of a project.
The capital expenditure is known as a 'project amount' and is expenditure incurred:
- •
- to create or upgrade community infrastructure for a community associated with the project; this expenditure must be paid (not just incurred) to be a project amount
- •
- for site preparation costs for depreciating assets (other than draining swamp or low-lying land, or clearing land for horticultural plants)
- •
- for feasibility studies or environmental assessments for the project
- •
- to obtain information associated with the project
- •
- in seeking to obtain a right to intellectual property
- •
- for ornamental trees or shrubs.
Mining capital expenditure and transport capital expenditure (see Mining and quarrying, and minerals transport) can also be a project amount that you can allocate to a project pool and for which you can claim a deduction.
The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset held by you.
If the expenditure incurred arises from a non-arm's length dealing and is more than or less than the market value of what the expenditure was for, the amount of the expenditure is taken to be that market value instead.
The deduction for project amounts allocated to a project pool begins when the project starts to operate. For projects that start on or after 10 May 2006 and that only contain project amounts incurred on or after 10 May 2006 the calculation is:
(pool value × 200%) ÷ DV project pool life
For projects that started before 10 May 2006 the calculation is:
(pool value × 150%) ÷ DV project pool life
The 'DV project pool life' is the project life of a project or the most recently recalculated project life of a project.
Certain projects may be taken to have started to operate before 10 May 2006 (for example, when a project is abandoned and restarted on or after 10 May 2006 so that deductions can be calculated using the post 9 May 2006 formula).
The pool value for an income year is, broadly, the sum of the project amounts allocated to the pool up to the end of that year less the sum of the deductions you have claimed for the pool in previous years (or could have claimed had the project operated wholly for a taxable purpose).
The pool value can be subject to adjustments.
If you are entitled to claim a GST input tax credit for expenditure allocated to a project pool, you reduce the pool value in the income year in which you are, or become, entitled to the credit by the amount of the credit. Certain increasing or decreasing adjustments for expenditure allocated to a project pool may also affect the pool value.
If during the 2023-24 income year, you met or otherwise ceased to have an obligation to pay foreign currency incurred as a project amount allocated to a project pool, a foreign currency gain or loss (referred to as a forex realisation gain or loss) may have arisen under the forex provisions. If the project amount was incurred in the 2023-24 income year and became due for payment within 12 months after you incurred it, then the pool value for the income year you incurred the project amount is adjusted by the amount of any forex realisation gain or loss. This is known as 'the 12-month rule'. You are able to elect out of the 12-month rule in limited circumstances; for more information, see Election out of the 12 month rule.
If you have elected out of the 12-month rule, the pool value is not adjusted; instead, any forex realisation loss is generally deductible, and any gain is included in assessable income.
DV project pool life: You must estimate the project life of your project each year. The project life may not change, but reconsider the question each year. If your new estimate is different from the previous estimate, the DV project pool life you use in the formula is that new estimated project life, not the project life estimated the previous year.
The project life is worked out by estimating how long (in years and fractions of years) it will be from when the project starts to operate until it stops operating. Factors that are personal only to you, such as how long you intend to carry on the project, are not relevant when objectively estimating project life. Factors outside your control, such as something inherent in the project itself, for example, a legislative or environmental restriction limiting the period of operation, would be relevant.
If there is no finite project life, there is no project and therefore no deduction is available under these rules.
There is no need to apportion the deduction if the project starts to operate during the income year, or for project amounts incurred during the income year.
You reduce the deduction to the extent to which you operate the project for a non-taxable purpose during the income year.
If the project is abandoned, sold or otherwise disposed of in the income year, you can deduct the sum of the closing pool value of the prior income year plus any project amounts allocated to the pool during the income year, after allowing for any necessary pool value adjustments. A project is abandoned if it stops operating and will not operate again.
Your assessable income will include any amount received for the abandonment, sale or other disposal of a project.
If you recoup an amount of expenditure allocated to a project pool or if you derive a capital amount for a project amount or something on which a project amount was expended, you must include the amount in assessable income.
If any receipt arises from a non-arm's length dealing and the amount is more than or less than the market value of what the receipt was for, you are taken to have received that market value instead.
Business related costs – section 40-880 deductions
UCA allows a 5-year write-off for certain business-related capital expenditure, provided that no other provision either takes the expenditure into account or denies a deduction (known as blackhole expenditure).
Capital expenditure is deductible if you incur it:
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- for your business
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- for a business that used to be carried on, such as capital expenses incurred in order to cease the business
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- for a business proposed to be carried on, such as the costs of feasibility studies, market research or setting up the business entity
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- as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership (and the company, trust or partnership has carried on a business).
If you incur capital expenditure for your existing business, a business that you used to carry on or a business that you propose to carry on, the capital expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.
You cannot deduct capital expenditure for an existing business that is carried on by another entity. However, you can deduct capital expenditure you incur for a business that used to be, or is proposed to be, carried on by another entity. The capital expenditure is only deductible to the extent that:
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- the business was, or is proposed to be, carried on for a taxable purpose, and
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- the capital expenditure is in connection with your deriving assessable income from the business and the business that was carried on or is proposed to be carried on.
A 5-year straight-line write-off is allowed for certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business. See Claiming a tax deduction for depreciating assets and other capital expenses.
If you are an individual operating either alone or in partnership, this deduction may be affected by the non-commercial loss rules; see Non-commercial losses.
Example: allowable business related costs
Ralph decides to carry on his existing business through a company. He will continue to carry on the business for a taxable purpose. He will be the only shareholder of the company and he will be entitled to receive all the profits from the business.
Ralph incurs expenses to incorporate the existing business. Legally, he and the company are separate entities. However, Ralph can deduct the incorporation expenses (subject to non-commercial loss rules). This is because the expenditure is for the business to be carried on by the company and the expenditure is in connection with his deriving assessable income from the business.
The extent to which a business is, was or is proposed to be carried on for a taxable purpose is worked out at the time the expenditure is incurred. For an existing business or a business proposed to be carried on, you need to take into account all known and predictable facts in all years.
For a business to be 'proposed to be' carried on, you need to be able to sufficiently identify the business and there needs to be a commitment of some substance to commence the business. Examples of such a commitment are establishing business premises, investment in capital assets and development of a business plan. The commitment must be evident at the time the expenditure is incurred. It must also be reasonable to conclude that the business is proposed to be carried on within a reasonable time. This time may vary according to the industry or the nature of the business.
The deduction cannot be claimed for capital expenditure to the extent to which it:
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- can be deducted under another provision
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- forms part of the cost of a depreciating asset you hold, used to hold or will hold
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- forms part of the cost of land
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- relates to a lease or other legal or equitable right
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- would be taken into account in working out an assessable profit or deductible loss
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- could be taken into account in working out a capital gain or a capital loss
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- would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
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- is specifically not deductible under the income tax laws for a reason other than the expenditure is capital expenditure
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- is of a private or domestic nature
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- is incurred for gaining or producing exempt income or non-assessable non-exempt income
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- is excluded from the cost or cost base of an asset because, under special rules in UCA or the CGT regimes respectively, the cost or cost base of the asset was taken to be the market value
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- is a return of, or on, capital (for example, dividends paid by companies or distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).
If the expenditure:
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- arises from a non-arm's length dealing, and
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- is more than the market value of what the expenditure was for
then the amount of the expenditure is taken to be that market value instead.
You deduct 20% of the expenditure in the year you incur it and in each of the following 4 years.
Certain start-up expenditure is fully deductible in the income year incurred if:
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- you are a small business entity
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- you would be a small business entity if the aggregated turnover was less than $50 million, or
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- you are not in business and you are not connected with or an affiliate of another entity that is carrying on a business and that entity
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- is not a small business entity, and
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- would not be a small business entity if the aggregated turnover was less than $50 million.
See Certain start-up expenses immediately deductible.
Even if the business ceases or the proposed business does not commence (for example, if there is an unforeseen change in circumstances), the deduction may be claimed over the 5 years. Deductions for expenditure for a proposed business can be claimed before the business is carried on. However, if you are an individual taxpayer, the non-commercial loss rules may defer your deductions for pre- and post-business expenditure; see Non-commercial losses.
A recoupment of the expenditure may be included in your assessable income.
You can claim a deduction, subject to certain conditions, for the expenditure you incur in establishing trees in a carbon sink forest.
You can claim a maximum capital write-off rate of 7% of the expenditure incurred in establishing the trees (conditions apply).
You will find the rules in Subdivision 40-J of the ITAA 1997 and in Claiming a deduction for carbon sink forest expenses.
Small business entity concessions
Eligibility for small business entity concessions, simplified depreciation rules and rollover relief.
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Small business entities may qualify for a range of tax concessions. You are a small business entity for an income year if:
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- you carry on a business in that year, and
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- you have an aggregated turnover of less than $10 million.
The aggregation rules use the concepts of 'connected with' (which is based on control) and 'affiliates' to determine whether the turnover of any related business needs to be included in the aggregated turnover of your business.
Businesses that are not small businesses because their aggregated turnover is $10 million or more but less than $50 million can also access an immediate deduction for certain start-up expenses and for prepaid expenditure.
Small business energy incentive
The Treasury Laws Amendment (Support for Small Business, Charities, and other Measures) Bill 2023 provides businesses with an aggregated annual turnover of less than $50 million with access to a bonus deduction equal to 20% of the cost of eligible assets or improvements to existing assets that support more efficient energy use.
This is a temporary measure to support these businesses to improve their energy efficiency and save on energy bills. The bonus deduction applies to the cost of eligible assets and improvements up to a maximum amount of $100,000 with the maximum bonus deduction being $20,000.
This measure is not yet law. For more information, go to Small business energy incentive.
If you are an eligible small business entity, you may choose to calculate deductions for your depreciating assets using these rules.
Small business entities can claim an immediate deduction for eligible depreciating assets under the instant asset write off.
Other depreciating assets are pooled in a general small business pool and deducted at the rate of 30%. Newly acquired assets are deducted at 15% (half the pool rate) in the first year, regardless of when they were acquired during the year.
The threshold at which a small business writes off the total balance of the general small business pool is aligned with the relevant instant write-off threshold.
There have been changes to the instant asset write-off threshold over recent years. See, Small business support – instant asset write off.
If you choose to use the simplified depreciation rules, you must:
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- use them to work out deductions for all your depreciating assets except those specifically excluded
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- apply the entire set of rules, not just individual elements (for example, you cannot opt out of instant asset write off)
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- only claim a deduction for the portion of the asset used for business or other taxable purposes and not for the portion for private use.
If you don't want to apply the instant asset write-off, you need to opt out of the simplified depreciation rules for the 2023–24 income year. However, you must still deduct the balance of your small business pool in the income year you choose to opt out of the simplified depreciation rules.
A small number of assets are excluded from the simplified depreciation rules and a car limit applies to the cost of passenger vehicles.
The 5-year 'lock out' rule that prevented small businesses from re-entering the simplified depreciation regime for 5 years after they opted out continues to be suspended until 30 June 2024.
For more information, see Simpler depreciation for small business.
As part of the small business tax concessions, you may be able to defer any gain or loss resulting from a transfer of a depreciating asset between entities with the same economic ownership under the small business restructure rollover concessions, which apply from 1 July 2016.
Modifications, under the Commissioner's remedial power, may apply to the asset disposal to prevent unintended taxation consequences where:
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- a transfer takes place on or after 8 May 2018, and
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- the asset transferred satisfies conditions under a small business restructure rollover.
For more information, see:
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- Small business restructure rollover
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- CRP 2017/2 Taxation Administration (Remedial Power – Small Business Restructure Roll-over) Determination 2017.
Certain start-up expenses immediately deductible
When certain start-up expenses are immediately deductible under Section 40-880.
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Section 40-880 allows certain start-up expenditure to be immediately deductible if:
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- it relates to a business that is proposed to be carried on and
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- it is incurred
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- in obtaining advice or services relating to the proposed structure or the proposed operation of the business, or
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- in payment to an Australian Government agency of a fee, tax or charge relating to setting up the business or establishing its operating structure and
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- in that income year in which the deduction is claimed, you
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- were a small business entity
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- would be a small business entity if the aggregated turnover threshold was less than $50 million, or
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- did not carry on a business and were not connected with or an affiliate of another entity that
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- is not a small business entity and
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- would not be a small business entity if the aggregated turnover threshold was less than $50 million.
Professional advice and services relating to the structure or the operations of the proposed business
Professional advice and services that may be deductible under this section include advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not include the cost of acquiring assets that may be used by the business. Similarly, advice and services in relation to the operation of the proposed business includes professional advice on the viability of the proposed business (including due diligence where an existing business is being purchased) and the development of a business plan.
Payments to Australian Government agencies
Payments of taxes, fees or charges relating to establishing the business or its structure to an Australian Government agency may be immediately deducted under this section.
An Australian Government agency is a Commonwealth, state or territory government (or an authority of these). Local governments are included as an authority of the relevant state or territory government.
Broadly, this category of expenditure includes regulatory costs incurred in setting up the new business. 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. The payment of these general taxes does not relate to establishing a business or its structure but instead to the operation and activities of the businesses. Such general taxes are also not normally deductible under section 40-880.
Immediate deductibility is also limited to expenditure by certain entities, with the effect of excluding expenditure incurred by larger businesses.
If you carried on a business in the income year, it must be a small business entity or would be a small business entity if the aggregated turnover threshold was less than $50 million.
A small business entity is broadly defined under tax law as an entity with an aggregate annual turnover of less than $10 million.
Alternatively, if you did not carry on a business in the income year, you must not be connected with or be an affiliate of another entity that carries on a business in the income year and:
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- that other entity is not a small business entity
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- that other entity would not be a small business entity if the aggregated turnover threshold was less than $50 million.
Example: start-up expense which can be immediately deducted
Winston Co is a company that is a small business entity and is in the process of setting up a florist business, to be operated by a separate entity. Winston Co is uncertain as to the best location for the proposed business. Winston Co obtains advice from a consultant in order to assist in determining a suitable location. The cost of obtaining this advice is fully deductible in the income year in which it was incurred.
Example: capital expenditure which cannot be immediately deducted
Percy already carries on an established small landscaping business. As part of plans to expand and improve his business Percy obtains financial advice about financing the expansion. As Percy's business is already established, Percy will not be able to claim an immediate deduction for the expense as it is not a start-up cost. However, Percy may be able to claim a deduction over 5 years; see Business related costs – section 40-880 deductions.
Assets for which deductions are claimed under UCA
For some depreciating assets, deductions must be claimed under UCA rather than under the simplified depreciation rules:
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- assets allocated to a low-value or a common-rate pool before you started to use the simplified depreciation rules (those assets must remain in the pool and deductions must be claimed under UCA)
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- horticultural plants
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- in-house software where the development expenditure is allocated to a software development pool; see Software development pools, and
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- assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease. (This does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring.)
Depreciating assets used in rental properties are generally excluded from the simplified depreciation rules on the basis that they are subject to a depreciating asset lease.
You cannot deduct an amount for a decline in value of second-hand depreciating asset in a residential rental property under the simplified depreciation rules if the amount is not deductible under UCA.
Capital expenditure deductible under UCA
As the simplified depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity that does not form part of the cost of a depreciating asset may be deducted under UCA for deducting capital expenditure.
This includes capital expenditure on certain business related costs and amounts directly connected with a project; see Capital expenditure deductible under UCA.
Under UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or having another entity develop) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to a pool; see Software development pools.
If you have allocated such expenditure to a software development pool either before or since using the simplified depreciation rules, you must continue to allocate such expenditure to a software development pool and calculate your deductions under UCA.
You can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the simplified depreciation rules when you start to use it (or install it ready for use) for a taxable purpose, if you:
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- have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
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- incur the expenditure in developing in-house software that you don't intend using solely for a taxable purpose.
Deductions for in-house software acquired off the shelf by a small business entity for use in their business are also available under the simplified depreciation rules.
For information on the deductibility of website expenses, see Taxation Ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website.
A small business entity can choose to claim deductions under either the simplified depreciation rules or UCA for certain depreciating assets used in the course of carrying on a business of primary production.
The choice is available for:
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- Water facilities
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- fencing assets
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- fodder storage assets
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- depreciating assets relating to
You can choose to claim your deductions under the simplified depreciation rules or UCA for each depreciating asset. Once you have made the choice, it cannot be changed.
Record keeping for depreciating assets
Records to keep for depreciating assets, low-value pools and rollover relief available under UCA.
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- Records to keep for a depreciating asset
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- Record keeping for low-value pools
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- Record keeping for rollover relief
Records to keep for a depreciating asset
You must keep records which show the following information for each depreciating asset:
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- the first and second elements of cost
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- the opening adjustable value for 2023–24
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- any adjustments made to cost or adjustable value
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- the date you started holding the asset and its start time
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- the rate or effective life used to work out the decline in value
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- the method used to work out the decline in value
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- the amount of your deduction for the decline in value and any reduction for use of the asset for a non-taxable purpose
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- the closing adjustable value for 2023–24
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- any recoupment of cost you have included in assessable income, and
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- if a balancing adjustment event occurred for the asset in 2023–24
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- the date of the balancing adjustment event
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- the termination value
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- the adjustable value on the date of the balancing adjustment event
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- the balancing adjustment amount
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- any reduction of the balancing adjustment amount, and
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- details of any rollover or balancing adjustment relief.
You must also keep:
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- details of how you worked out the effective life of a depreciating asset where you have not adopted the effective life determined by the Commissioner
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- if you have recalculated the effective life of an asset
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- the date of the recalculation
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- the recalculated effective life
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- the reason for the recalculation, and
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- details of how you worked out the recalculated effective life
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- original documents such as suppliers' invoices and receipts for expenditure on the depreciating asset.
You must keep additional records if:
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- you acquire an asset from an associate, or
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- you acquire a depreciating asset and
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- the new user is the same as the former user, or
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- the new user is an associate of the former user.
See Depreciating asset acquired from an associate and Sale and leaseback arrangements.
Failure to keep proper records will attract penalties.
Record keeping for low-value pools
For depreciating assets in a low-value pool, you need to keep the following details (some details relate to the asset and some to the pool):
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- the date you started holding the asset
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- the date the asset started in the low-value pool
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- the closing low-value pool balance at the end of 2022–23
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- any second element of cost you incurred in 2023–24 for assets in the pool at the end of 2022–23
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- the opening adjustable value of any low-value asset you allocated to the pool in 2023–24
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- the first element of cost of any low-cost asset you allocated to the low-value pool in 2023–24
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- the second element of cost of low-cost assets and low-value assets you allocated to the low value pool in 2023–24
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- the taxable use percentage of each amount added to the pool in 2023–24
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- the termination value and the taxable use percentage for assets in the pool for which a balancing adjustment event occurred in 2023–24
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- the income year and the date of the balancing adjustment event
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- the closing pool balance
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- the decline in value
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- any amount included in assessable income because the taxable use percentage of the termination value exceeds the closing pool balance, and
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- any recoupment of cost you have included in assessable income.
A capital gain or capital loss may arise when a balancing adjustment event occurs either:
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- for a depreciating asset which you expect to use for a non-taxable purpose
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- for a depreciating asset which you have allocated to a low-value pool and expect to use for a non-taxable purpose.
If either of the above occurs, you must keep records which show:
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- the first and second elements of cost
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- the termination value
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- the taxable use percentage.
Keep records about a depreciating asset allocated to a low-value pool for 5 years, starting from the end of the income year in which the asset was allocated to the pool.
There are 2 exceptions:
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- If an amount is included in the second element of an asset's cost after the asset is allocated to a low-value pool, keep the records of the cost for a period of 5 years from the time you incurred the expenditure.
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- Keep records of acquisitions relating to delayed claims for GST input tax credits for at least 5 years after lodgment. If a claim for input tax credits relates to a depreciating asset in a low-value pool, keep the record of acquisition for 5 years from a date which begins later than the end of the income year in which the asset was allocated to the pool.
Record keeping for rollover relief
If automatic rollover relief applies (see Rollover relief) the transferor must give the transferee a notice:
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- containing enough information for the transferee to work out how UCA apply to the transferee's holding of the depreciating asset
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- within 6 months after the end of the transferee's income year in which the balancing adjustment event occurred.
The transferee must keep a copy of the notice for 5 years after the asset is:
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- disposed of
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- lost, or
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- destroyed.
If a transferor and transferee jointly choose rollover relief, the decision:
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- must be in writing, and
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- must contain enough information for the transferee to work out how UCA apply to the transferee's holding of the depreciating asset
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- must be made within 6 months after the end of the transferee's income year in which the balancing adjustment event occurred.
The transferor must keep a copy of the agreement for 5 years after the balancing adjustment event occurred.
The transferee must keep a copy of the agreement for 5 years after the next balancing adjustment event that occurred for the asset.
Definitions
Definitions for the most commonly used uniform capital allowances terms.
| Former depreciation rules | UCA |
|---|---|
| Plant | Depreciating asset |
| Own | Hold |
| Cost | First and second elements of cost |
| Luxury car limit | Car limit |
| Income-producing use | Taxable purpose |
| Depreciation | Decline in value |
| Undeducted cost | Adjustable value |
Adjustable value: A depreciating asset's adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time.
The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.
Balancing adjustment amount: The balancing adjustment amount is the difference between the termination value and the adjustable value of a depreciating asset at the time of a balancing adjustment event.
If an asset's termination value is greater than its adjustable value, the difference is generally an assessable balancing adjustment amount.
If the termination value is less than the adjustable value, the difference is generally a deductible balancing adjustment amount.
Balancing adjustment event: Generally, a balancing adjustment event occurs for a depreciating asset if you stop holding it (for example, if you sell it) or you stop using it and you expect never to use it again.
Car limit: If the first element of cost of a car exceeds the car limit for the income year in which you start to hold it, that first element of cost is generally reduced to the car limit. The car limit for 2023–24 is $68,108xx,xxx.
Days held: Days held is the number of days you held the asset in the income year in which you used it or had it installed ready for use for any purpose.
Decline in value: Deductions for the cost of a depreciating asset are based on the decline in value. For most depreciating assets, you have the choice of 2 methods to work out the decline in value of a depreciating asset: the prime cost method or the diminishing value method; see Methods of working out decline in value.
Depreciating asset: A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
Some assets are specifically excluded from the definition of depreciating asset; see What is a depreciating asset?
Effective life: Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:
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- having regard to the wear and tear from your expected circumstances of use
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- assuming it will be maintained in reasonably good order and condition, and
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- having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.
First element of cost: The first element of cost is, broadly, the amount paid (money or the market value of property given) or the amount taken to have been paid to hold the asset. It also includes amounts incurred that are taken to have been paid for starting to hold the asset. The amounts must be directly connected with holding the asset.
Holder: Only a holder of a depreciating asset may deduct an amount for its decline in value. In most cases, the legal owner of a depreciating asset will be its holder; see Who can claim deductions for the decline in value of a depreciating asset?
Indexation: Indexation is a methodology used in calculating a cost for capital gains tax for depreciating assets acquired before 21 September 1999 that have been used partly for a private purpose.
Second element of cost: The second element of cost is, broadly, the amount paid (money or the market value of property given) or the amount taken to have been paid to bring the asset to its present condition and location at any time, such as the cost incurred to improve the asset. It also includes expenses incurred on a balancing adjustment event occurring for the asset, such as advertising or commission expenses.
Start time: A depreciating asset's start time is generally when you first use it (or install it ready for use) for any purpose, including a private purpose.
Taxable purpose: A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.
Termination value: Generally, the termination value is what you receive, or are taken to receive, for an asset as a result of a balancing adjustment event. For example, the proceeds from selling an asset would be the asset's termination value.
Worksheets for depreciating assets and low-value pools
Get the worksheets and worksheet guidelines for depreciating assets and low-value pools.
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- Guidelines for using the depreciating assets worksheet
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- Guidelines for using the low-value pool worksheet
Guidelines for using the depreciating assets worksheet
Worksheet 1 and guidelines for using the depreciating assets worksheet.
Worksheet 1: Depreciating assets
Download worksheet 1: Depreciating assets (PDF 50KB).
Primary production only and Non-primary production only: Use a separate worksheet for each category.
Cost: The cost of a depreciating asset includes the first and second elements of cost. You must adjust the cost of an asset in certain circumstances, such as when the first element of a car's cost exceeds the car limit. If you have adjusted the cost of the asset, include the adjusted cost in this column; see Cost of a depreciating asset.
Opening adjustable value and Adjustable value at end of year: The adjustable value of a depreciating asset at any time is its cost reduced by any decline in value up to that time. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.
Balancing adjustment events: Generally, a balancing adjustment event occurs for a depreciating asset when you stop holding it (for example, if you sell it) or when you stop using it and you expect never to use it again; see What happens if you no longer hold or use a depreciating asset?
Termination value: Generally, the termination value is what you receive or are taken to have received for the asset as a result of a balancing adjustment event, such as the proceeds from selling the asset; see Termination value.
Balancing adjustment amounts: If the asset's termination value is greater than its adjustable value, the excess is generally an assessable balancing adjustment amount. If the termination value is less than the adjustable value, the difference is a deductible balancing adjustment amount. If you use the asset for a non-taxable purpose, you reduce the balancing adjustment amount and a capital gain or capital loss may arise; see Depreciating asset used for a non-taxable purpose.
Balancing adjustment relief: This refers to the offsetting of otherwise assessable balancing adjustment amounts for involuntary disposals (see Involuntary disposal of a depreciating asset) or when rollover relief applies; see Rollover relief.
Decline in value: There are 2 methods of working out the decline in value of a depreciating asset, prime cost and diminishing value; see Methods of working out decline in value.
Effective life and Percentage rate: Both the prime cost and diminishing value methods are based on a depreciating asset's effective life; see Effective life of a depreciating asset. However, if you are able to use accelerated rates of depreciation (see Backing business investment – accelerated depreciation) you use the relevant percentage rate to work out the decline in value rather than the effective life.
Taxable use percentage: This is the proportion of your use of a particular depreciating asset for a taxable purpose.
Deduction for decline in value: Your deduction for the decline in value of the asset is the decline in value reduced to the extent you used the asset for a non-taxable purpose; see Decline in value of a depreciating asset used for a non-taxable purpose. Your deduction may also be reduced if the asset is a leisure facility or a boat.
Guidelines for using the low-value pool worksheet
Worksheet 2 and guidelines for using the low-value pool worksheet.
Download worksheet 2: Low-value pool (PDF 53KB).
Description of low-value asset: In this column include a brief description of any low-value assets you allocated to the pool for the current year. A low-value asset is a depreciating asset (other than a horticultural plant) that is not a low-cost asset but that has an opening adjustable value of less than $1,000 worked out using the diminishing value method.
Opening adjustable value of low-value asset: The adjustable value of any depreciating asset at any time is its cost (first and second elements) reduced by any decline in value up to that time. The opening adjustable value of an asset for an income year is generally the adjustable value at the end of the previous income year.
Taxable use percentage: When you allocate an asset to a low-value pool, you must make a reasonable estimate of the percentage of your use of the asset that will be for a taxable purpose over its effective life (for a low-cost asset) or its effective life remaining at the start of the income year it was allocated to the pool (for a low-value asset).
Reduced opening adjustable value of low-value asset: This is the taxable use percentage of the opening adjustable value of any low-value asset you have allocated to the pool for the income year.
Description of low-cost asset or second element of cost of asset in pool: In this column include a brief description of any low-cost assets you allocated to the pool for the income year. A low-cost asset is a depreciating asset (other than a horticultural plant) whose cost (first and second elements) as at the end of the year in which the start time occurred is less than $1,000. Also show in this column a description of any amounts included in the second element of cost of any assets in the pool at the end of the previous year and of any low-value assets allocated for this year. The second element of an asset's cost is capital expenditure on the asset which is incurred after you start to hold it, such as a cost of improving the asset; see Cost of a depreciating asset.
Cost of low-cost asset and second element of cost: Include the cost after you have made any adjustments, such as for GST input tax credits; see Cost of a depreciating asset.
Reduced cost of low-cost asset or second element of cost: This is the taxable use percentage multiplied by:
- •
- the cost of each low-cost asset you allocated to the pool for the income year
- •
- any amounts included in the second element of cost for the income year for assets in the pool at the end of the previous year
- •
- low-value assets which you allocated to the pool in the current income year.
Balancing adjustment events: Generally, a balancing adjustment event occurs for a depreciating asset if you stop holding it (for example, if you sell it) or you stop using it and you expect never to use it again; see What happens if you no longer hold or use a depreciating asset?
Termination value: Generally, the termination value is what you receive or are taken to have received for the asset as a result of a balancing adjustment event, such as the proceeds from selling the asset; see Termination value.
Reduced termination value: This is the taxable use percentage of the asset's termination value. Use the taxable use percentage you estimated when you allocated the asset to the pool. This reduced termination value decreases the amount of the closing pool balance. If it exceeds the amount of the closing pool balance, make that balance zero and include the excess in assessable income. If you use the asset for a non-taxable purpose, a capital gain or capital loss may arise when a balancing adjustment event occurs for the asset; see Balancing adjustment event for a depreciating asset in a low-value pool.
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References
ATO references:
NO NAT 19962; QC 72686
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