Employees guide for work expenses

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Part F - Decline in value under the capital allowance provisions

Depreciating assets
Effective life
Prime cost and diminishing value methods

Assets that have a longer life, normally more than one income year, may be capital assets. This includes items such as tools, computers and books. The expense incurred to purchase these items is capital expenditure and it can't be claimed under the general deduction provisions (see Claiming a deduction: the basic conditions ). Instead, it may be possible to claim the decline in value of the capital expenditure each year under the capital allowance provisions.

For the cost of a capital asset to be deductible in this way, it needs to be a 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.

Example – asset categories

Rosa buys a replacement arc welder to use as part of her work. She also buys some disposable welding helmet lens covers. The arc welder is a capital asset as it has a useful life longer than a year. As it has a limited effective life and will decline in value over time, it is a depreciating asset that may be deductible under the capital allowance provisions.

The disposable welding helmet lens covers aren't a capital asset, as their effective life is very short. The general rules for claiming a deduction must be applied when claiming a deduction for the lens covers.

Depreciating assets

You can claim a deduction for capital expenditure if you hold a depreciating asset during the income year, and you use it in earning your employment income. For an employee, holding an asset usually means that you are its legal owner. There are 2 different treatments for depreciating assets, depending on whether they cost more or less than $300.

Assets costing $300 or less

An immediate deduction for assets costing $300 or less may be available under the capital allowance provisions if your use the assets more than half the time for work purposes. You need to apportion the expense if you use the asset for work and private purposes.

To be able to claim the immediate deduction, you need to meet all 4 of the following tests:

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the asset costs $300 or less

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you use the asset mainly to produce non-business assessable income

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the asset isn't a part of the set costing more than $300

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the asset isn't one of a number of items that are identical or almost identical costing more than $300.

We consider each of these in more detail below.

Test 1 – the asset costs $300 or less

The cost of the asset is generally what you pay for it. Where the asset cost $300 or less, you may be able to claim an immediate deduction for the full purchase price. If you hold an asset jointly with others, your interest in the asset (that is, the portion you own) is considered the relevant asset for the test. Therefore, if the cost of your interest in the asset is $300 or less then you can claim the immediate deduction, even if the total cost is above $300.

Example – jointly held assets

Yousef and Giovani purchase a laptop for $1,000, with Yousef contributing $750 and Giovani contributing $250. They therefore own 75% and 25% of the laptop respectively. Giovani may be able to claim an immediate deduction because the cost of his interest in the laptop doesn't exceed $300. Yousef can't claim an immediate deduction as the cost of his interest exceeds $300, but he can claim the deduction for the decline in value of the asset.

Test 2 – you use the asset mainly to produce non-business assessable income

To claim the immediate deduction, you must use the asset mainly (more than 50% of time) for the purpose of producing assessable income that is not from carrying on a business.

You must still reduce your deduction if you use the asset for a non-income producing or private purpose.

If you don't use the asset mainly to produce non-business assessable income, you can still claim a deduction for the decline in value of the depreciating asset over its effective life. You calculate your deduction in the same way as .

Example – multiple use asset

Rob buys a calculator for $150. He uses the calculator 40% of the time in his sole-trader business and 60% of the time for his job as an employee bookkeeper. As the calculator is used more than 50% of the time for producing assessable income in his employee role, Rob 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 his job, 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, that is, Rob's deduction would be $90 ($150 × 60%).

Test 3 – the asset not part of a set costing more than $300

Assets that form part of a set that cost more than $300 aren't eligible for the immediate deduction. You must decide on a case-by-case basis whether items form a set. Items are part of a set if they are:

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interdependent

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marketed as a set, or

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designed and intended to be used together.

Example – set of books

Anh works as a lawyer at a suburban firm. She discovers a series of 3 books about conveyancing that would greatly help in her work. The series is marketed as a set, and each volume builds on the knowledge of the previous one. The 3 books are a set.

The 3 books cost $600 together but can be bought separately for $200 each. Anh buys one book each month for 3 consecutive months in the same income year for a total cost of $600.

Although the cost of each book is less than $300, Anh can't claim an immediate deduction for the books, because they are a set and the cost of the set is over $300.

A group of assets acquired in an income year may be a set in themselves. This is the case even if they also form part of a larger set acquired over more than one income year. Assets acquired in another income year aren't considered when working out whether items form a set or the total cost of a set.

Example – set of items part of a larger set

Paula, a primary school teacher, hears about a series of 12 progressive reading books. The books are designed to develop children's reading skills in stages. 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 books are at an advanced level.

Paula buys one book a month beginning in January and by 30 June she holds the first 6 books (the basic readers) at a total cost of $240. Because of the interdependency of the books, these 6 books are a set even though they can be purchased individually and 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 (that is, $240).

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.

Example – items not forming part of a set

Mary buys some new tools for her work as a carpenter. She buys a shifting spanner, a boxed set of screwdrivers and a hammer for her toolkit. Each item costs $300 or less.

While these tools may comprise or add to Mary's toolkit, they're not a set because they aren't interdependent or designed to be used together. It would make no difference if Mary 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 as a set. However, as the cost is $300 or less the deduction is available.

A set needs to have more than one depreciating asset. In some cases, a single depreciating asset may be made up of more than one item.

Example – multiple items that aren't a set

Shelley works as editor and buys a 3-volume dictionary for her reference library. Although she calls it a 'set' of dictionaries, it is a single edition, with the 3 volumes having a single integrated function. It is a single depreciating asset and the set test doesn't apply.

Test 4 – asset not one of a number of items that are identical or substantially identical

If you acquire more than one depreciating asset that is identical or substantially identical, you need to work out whether their total cost is more than $300. Items are identical if they are the same in all respects. Items are substantially identical if they are the same in most respects even if there may be some minor or incidental differences. Factors to consider include colour, shape, function, texture, composition, brand and design.

Example – identical or substantially identical items

Tahir is employed as a cabinet maker and he supplies his own tools for work. He buys 10 300 mm F-clamps for $40 each. They are all from the same manufacturer. Each clamp is sold separately and comes in its own packaging. They have a total cost of $400.

Tahir's 300 mm F-clamps are all identical as they are all from the same brand and have the same design, manufacturer and use. They aren't eligible for immediate deduction.

Assets costing over $300

If your work-related asset cost more than $300, you can claim its cost over its effective life.

You need to apportion the expense if you use the asset for both private and work purposes.

For more information, see:

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Apportioning work-related expenses

Effective life

An asset's effective life is how long it can be expected to last considering how it is used. The ATO publishes the effective life of most assets, which you may use to calculate the decline in value. These were updated and published annually but are now in Tables A and B in the Income Tax (Effective Life of Depreciating Assets) Determination 2015. Alternatively, you can use your own estimate based on your expected usage pattern.

You can recalculate the effective life of an asset if you make an improvement to the asset that increases its cost by 10% or more in the income year or if circumstances arise that result in your initial estimate of the effective life being inaccurate.

For more information, see:

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Effective life of depreciating assets

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Income Tax (Effective Life of Depreciating Assets) Determination 2015

Start time

The start time of a depreciating asset is when you first use it or install it to use for any purpose, including a private purpose. The asset declines in value from its start time, but you can only claim a deduction for the decline in value when you start using it to earn employment income. If you initially purchase an asset for private use, then later use it to earn employment income, you need to work out the decline in value from the start time.

Example – start time before use to earn employment income

Stacey purchases a laptop computer on 1 July 2017 and uses it for private purposes only, until 1 July 2018, when she starts using it partially for work.

Laptop computers have a 2-year effective life, so Stacey needs to work out the decline in value from 1 July 2017 onwards, but she can start claiming a deduction for the decline in value from 1 July 2018. This means Stacey can only claim the decline in value for the last year of the effective life of the laptop.

The amount she can claim will need to be apportioned for the amount of time she uses the laptop for work and private purposes.

The elements of cost

To work out the decline in value of a depreciating asset, you also need to know its cost, which has 2 elements.

Generally, the first element of cost is the amount you have paid to hold the asset. This is most commonly the purchase price, but also includes any other expenses you incur to acquire the asset (such as shipping).

The second element of cost is generally the amounts you have paid after you have acquired the asset. These costs include those to bring the asset to its present condition and location, including improvements to the asset.

Example – first and second elements of cost

Tom is employed as an arborist and he buys a new chainsaw for $2,300 online. It costs an additional $50 to get the chainsaw delivered to his house. After one month, Tom spends $150 to upgrade the muffler on the chainsaw.

The first element of the cost is $2,350. This amount includes the purchase cost of the chainsaw and the delivery cost. The delivery cost is included in the first element of the cost as it is directly connected with Tom starting to hold the chainsaw.

The $150 Tom spent to upgrade the muffler is added to the second element of the cost of the chainsaw as it was incurred after he began to hold the asset.

Prime cost and diminishing value methods

To claim the decline in value of a depreciating asset, you use either the prime cost method or the diminishing value method. You can choose whichever method you prefer. However, once you make the choice, you can't change the method in future years. If you acquire the asset from an associate, such as your spouse or a business partner, you have to continue using the same method that they chose to depreciate the asset.

Prime cost method

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life. The formula for calculating the annual decline in value using the prime cost method is:

Asset's cost × (Days held ÷ 365) × (100% ÷ Asset's effective life)


If the depreciating asset is used for work-related purposes and private purposes, you can only claim the work-related use percentage of the decline in value as a deduction.

Diminishing value method

The diminishing value method assumes that the value of a depreciating asset decreases faster earlier in its effective life. The formula for working out the annual decline in value using the diminishing value method in the income year where the asset's start time occurs is:

Base value × (Days held ÷ 365) × (200% ÷ Asset's effective life)


If the depreciating asset is for work-related purposes and private purposes, you can only claim the work-related use percentage of the decline in value as a deduction.

The base value for the income year in which the asset's start time occurs is the asset's cost. In future years, the base value is the asset's opening adjustable value for that year, plus any amount included in the asset's second element of cost, such as costs to improve the asset, incurred in the year.

For more information, see:

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For help with the calculation of the annual decline in value you can use the depreciation and capital allowances tool

Example – depreciating asset

Ben installs a new desktop computer on 5 February 2019 that he bought for $3,000. He uses it 40% for work and 60% privately. It has an effective life of 4 years. Ben calculates the decline in value using both methods to work out which suits him better.

Ben calculates the decline in value using the prime cost method for the first year as below:

$3,000 × (146 ÷365) × (100% ÷ 4) = $300


As he only uses the computer 40% for work, he calculates his deduction for the decline in value as follows:

Decline in value × Work use percentage = Claim amount
$300 × 40% = $120


Ben uses the calculator on ato.gov.au to work out the decline in value for future years and records the following results. He is aware that he needs to adjust for any second element costs, such as costs to improve the asset, or if he disposes of the asset.

Table 4: Example decline in value schedule (Ben)

Income year	Decline in value	Taxable use	Deductible decline in value
2018–19	$300.00	40%	$120.00
2019–20	$752.05*	40%	$300.82
2020–21	$750.00	40%	$300.00
2021–22	$750.00	40%	$300.00
2022–23	$447.95	40%	$179.18

*The decline in value is higher in 2019–20 year as it is a leap year.

Ben calculates the decline in value using the diminishing value method for the first year as follows:

$3,000 × (146 ÷ 365) × (200% ÷ 4) = $600


As he only uses the computer for work for 40% of the time, he calculates his deduction for the decline in value as follows:

Decline in value × Work use percentage = Claim amount
$600 × 40% = $240


Ben needs to calculate the adjustable value of the asset on 30 June 2019. This is the asset's cost less the decline in value:

Base value - Decline in value = Adjustable value
$3,000 - $600 = $2,400


This amount (along with any second element costs) forms the base value of the asset for the next year.

Ben uses the calculator on ato.gov.au to work out the decline in value for the future years and records the following results. He is aware that he will need to do an adjustment if he has any second element costs or if he disposes of the asset.

Table 5: Example decline in value schedule – future years (Ben)

Income year	Opening adjustable value	Decline in value	Taxable use	Deductible decline in value	Adjustable value at end of year
2018–19	$3,000.00	$600.00	40%	$240.00	$2,400.00
2019–20	$2,400.00	$1,203.28	40%	$481.31*	$1,196.72
2020–21	$1,196.72	$598.36	40%	$239.34	$598.36
2021–22	$598.36	$299.18	40%	$119.67	$299.18
2022–23	$299.18	$149.59	40%	$59.84	$149.59
2023–24	$149.59	$75.00	40%	$30.00*	$74.59
2024–25	$74.59	$37.30	40%	$14.92	$37.29
2025–26	$37.29	$18.65	40%	$7.46	$18.64
2026–27	$18.64	$9.32	40%	$3.73	$9.32
2027–28	$9.32	$4.67	40%	$1.87*	$4.65
2028–29	$4.65	$2.33	40%	$0.93	$2.32
2029–30	$2.32	$1.16	40%	$0.46	$1.16
2030–31	$1.16	$1.16	40%	$0.46	$0

Ben ultimately chooses to use the prime cost method as he thinks that method will suit him best.

* The days held are 366 in a leap year if the asset is held for the whole year.

For more information, see:

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Guide to depreciating assets

Amendment history

 

 

 

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