When a business or investment asset costs more than what can be immediately deducted, it is depreciated — deducted gradually over its useful life. For small businesses, the instant asset write-off concession allows immediate deduction of eligible assets up to a threshold, rather than spreading the deduction over years. Understanding the rules helps maximise your tax deductions and cash flow.
What Is Depreciation?
Depreciation (also called decline in value) is the reduction in value of an asset over time as it is used in a business or to produce income. Instead of deducting the full purchase price in year one, you deduct the decline in value each year over the asset’s effective life.
The ATO publishes standard effective lives in Tax Ruling TR 2023/1. Examples:
- Laptop / computer: 3 years
- Motor vehicle (car): 8 years
- Office furniture: 10 years
- Air conditioning unit: 10 years
- Tools — hand tools: 6 years; power tools: 5–8 years
Two Depreciation Methods
Prime Cost Method (Straight-Line)
Equal deductions each year over the asset’s effective life.
$$\text{Annual deduction} = \frac{\text{Cost} \times \text{Days held in year}}{365} \times \frac{1}{\text{Effective life}}$$
Example: $1,500 laptop, 3-year effective life, purchased 1 July. Annual deduction = $1,500 ÷ 3 = $500 per year
Diminishing Value Method
Higher deductions in early years, declining over time.
$$\text{Annual deduction} = \text{Opening value} \times \frac{200%}{\text{Effective life}} \times \frac{\text{Days held}}{365}$$
Example: $1,500 laptop, 3-year effective life.
- Year 1: $1,500 × (2/3) = $1,000
- Year 2: $500 × (2/3) = $333
- Year 3: $167 × (2/3) = $111
DV gives a larger deduction in year 1 but smaller deductions in later years. Total deductions are the same over the asset’s life.
Instant Asset Write-Off for Small Businesses
Eligible small businesses (aggregated annual turnover under a threshold — historically under $10 million) can immediately deduct the cost of eligible business assets up to the write-off threshold, rather than depreciating over time.
The threshold has changed frequently: Check the ATO website for the current threshold applicable to the financial year you are lodging. The threshold has varied between $1,000 and $150,000+ in recent years.
Key conditions:
- The asset must be used (or ready to use) for business by 30 June of the relevant year
- The asset must cost less than the applicable threshold
- The asset is not already depreciating in a pool
- Applies to new and second-hand assets
Example: A sole trader buys a $12,000 piece of equipment in October 2025 and the threshold is $20,000. Rather than depreciating over 5 years, the full $12,000 is deducted in FY2025–26.
General Small Business Pool
For small businesses, assets costing between certain thresholds (not eligible for instant write-off) can enter a general small business pool, which is depreciated at:
- 15% in the year of addition
- 30% in subsequent years (diminishing value)
Assets are pooled and the pool balance is depreciated together, simplifying record-keeping.
Employees vs Businesses
The depreciation rules described above for instant asset write-off and small business pools are for businesses (including sole traders).
Employees who purchase work-related equipment follow simpler rules:
- Items under $300 with primarily work use: claim in full in the year of purchase
- Items over $300: depreciate using prime cost or DV at the work-use proportion
- No access to the instant asset write-off concession (that is a small business measure)
Record-Keeping
For each depreciating asset, keep:
- Purchase receipt (date, amount, supplier)
- Record of business-use proportion (if mixed use)
- Running depreciation schedule showing opening value, deduction, and closing value each year
Keep records for five years from lodgement.
Frequently Asked Questions
Can I switch from diminishing value to prime cost? No. Once you choose a method for an asset, you cannot switch. The choice is made when you first include the asset in your depreciation schedule.
Do I need to depreciate assets under $100? Assets that cost less than $100 can generally be claimed in full in the year of purchase, without needing to depreciate.
What happens when I sell a depreciating asset? If you sell an asset for more than its current written-down value (the remaining book value), the difference is a balancing adjustment — included as assessable income. If you sell for less, you may have a deductible loss.
Can I claim depreciation on a car as an employee? Yes — at the work-use proportion, using prime cost or diminishing value, for cars used for work. The logbook method for vehicle expenses includes depreciation as one of the running costs at the work-use percentage.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.