Small Business Depreciation

General depreciation rules

If your business earns over $10 million per financial year, you’ll have to use the ATO’s general depreciation rules to calculate your asset depreciation.

As a small business owner, you can calculate using the general rules using the prime cost (straight line) method or the diminishing value method.

The prime cost method uses the following formula to claim a fixed yearly depreciation:

Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)

The diminishing value method assumes that your asset will depreciate the most in the earliest years of its life and then less as it gets older and utilises this formula:

Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)

Both methods require determining the asset's effective life using the ATO’s tool. You can make your own assessment in certain circumstances, but this must be justified to the ATO.

The General Depreciation rules can be quite complex, so it is always worthwhile to seek the advice of a qualified accountant.

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Simplified depreciation rules for small business entities

You can utilise the simplified depreciation rules if your small business earns an aggregated turnover of less than $10 million annually.

While a number of different rules apply to backdated financial year tax claims, this article only addresses the current simplified depreciation rules.

The key component of current simplified depreciation rules is the instant asset write-off, which lets you claim depreciation for your asset in one hit in one financial year rather than working out how it depreciates over time. We will go into more detail on this further down in this article.

If you decide that you are eligible and want to use simplified depreciation for your business, you must do the following:

Use the simplified rules to work out deductions for all of your eligible depreciation assets
Only claim depreciation for the portion of the asset used for business. Personal use is not deductible
Apply the entire set of rules, and don’t jump between general and simplified deductions for that financial year.

Assets included in the simpler depreciation rules

Depreciating assets that you can apply simplified depreciation rules to include:

tools and equipment (for example, electric sanders and saws)
computers, laptops and tablets
office furniture (freestanding)
office equipment (for example, coffee machines)
motor vehicles (for example, cars, vans and tractors).

Assets that are excluded include:

assets that are leased out, or expected to be leased out, for more than 50% of the time
assets you allocated to low-value assets (pool) when utilising general depreciation rules in a previous financial year
horticultural plants
software allocated to a software development pool
assets used in any research and development (R&D) activities
capital works, including buildings and structural improvements.

Limits to claiming

The current threshold for assets other than vehicles is $20,000 for the financial year 1 July 2023 - 30 June 2024.

Your business can claim more than $20,000 in total deductions; however, no one item can exceed the $20,000 threshold.

If, at any stage, your business turnover increases to over $10 million for the year, you will need to change over to using the general depreciation rules. Then, you will not be able to claim any more instant asset write-offs for any new assets.

Instant asset write-offs for small businesses

The instant asset write-off allows businesses that meet the criteria for simplified depreciation to claim immediate deductions for the business portion of an asset, meaning you must place your claim in the year the asset is first used or installed.

Here’s an example of an instant asset write-off:

Jeremy is a builder who has purchased a new tablet he plans to take on-site to help with his quoting. He also occasionally uses the tablet for personal use when travelling. He allocates 80% of his use to business and 20% to personal. Therefore, he can claim 80% of the purchase price of the tablet as an instant asset write-off.

The tablet cost $2000 - 20% for personal use = $1600. Jeremy will claim an instant asset write-off of $1600.

Instant asset write-offs for vehicles

Instant asset write-offs are also available for any vehicles you purchase for your small business. The 2024-25 threshold for depreciating a vehicle is $69,674.

If your vehicle is a passenger vehicle, you must ensure that the car limit applies—your vehicle must have a maximum of a one-tonne payload capacity.

Here is an example of how to apply an instant asset write-off to a vehicle:

Mary is a florist and purchases a vehicle to deliver flowers. She will not use the vehicle for personal reasons, so it will be a 100% business claim. The vehicle purchase price is $75,000, but due to the claiming threshold, Mary can only claim $69,674 of the purchase price as a tax deduction.

Learn more about writing off vehicles and their associated expenses.

$20,000 instant asset write off

The $20,000 instant asset write-off is a part of the simplified depreciation rules, not a separate claim.

The Australian Government introduced this measure in May 2023, increasing the instant-asset write-off threshold from $1000. This temporary increase will end in the 2024-2025 financial year.

Record keeping

Record keeping for simplified depreciation rules is much simpler than general depreciation rules.

Chances are, if you’re using a bookkeeping system, it’s already working your depreciation out for you. But be sure to check your settings are right for the rules you’re applying to your business.

You are required to keep records for five years, and these records must include:
Any changes in the usage of assets within the business
Any assets disposed of or sold
And how you worked out your opening pool balance (if applicable and you have used general depreciation rules in previous years)

Keeping copies of all your receipts is also always a good idea.