Depreciating Assets This Tax Time – How Does It Work?

A depreciating asset is any item you use in your business that has a limited effective life and is reasonably expected to lose value as it’s used. Common examples include computers, office furniture, tools, and motor vehicles. These are capital assets, meaning they provide benefit over more than one year, and so, rather than claiming them as an immediate deduction (in most cases), you claim the decline in value over time.

For Example

A sole trader purchases a new laptop for $2,400 (including GST) on 1 August 2024 to use exclusively in their business. The laptop has an effective life of 3 years.

Under Australian tax law, this laptop is considered a depreciating asset because:

• It is used to produce assessable income (business use),
• It has a limited effective life (it won’t last indefinitely), and
• Its value is expected to decline over time with use.

The business owner can claim a deduction for the decline in value of the laptop over its effective life using either the diminishing value or prime cost method — or, if eligible, they might be able to use the instant asset write-off under simplified depreciation rules for small businesses.

What Isn’t A Depreciating Asset?

It’s important to note that land and trading stock are excluded from being depreciating assets. Most intangible assets (like goodwill) are also excluded — though there are exceptions. You can claim depreciation on items such as in-house software, certain intellectual property rights, mining rights, and some telecommunications assets, provided they are not considered trading stock.

Interestingly, improvements to land, such as fences, windmills, and irrigation systems, may also be treated as depreciating assets, even though they are fixed to the land. They are considered separately for depreciation purposes, regardless of whether they can be physically removed.

Understanding what qualifies as a depreciating asset is crucial for accurate tax reporting and maximising your deductions.

For small businesses, the ATO also provides access to more straightforward depreciation rules, such as the instant asset write-off and small business depreciation pools, which can help smooth out cash flow and simplify record-keeping.

If you’re unsure how to treat a recent purchase or want to make the most of your depreciation deductions, we’re here to help. Let’s talk about your asset purchases and ensure you’re making the most of what you’re entitled to claim.