Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
Asset depreciation matters because it directly affects your tax bill. When you buy equipment, vehicles, or technology, the key question is whether you can claim the cost in this financial year or spread it over several years.
This article explains how depreciation works for small Australian businesses, including ordinary depreciation, the instant asset write-off, small business pooling, and whether temporary full expensing still applies.
- Many businesses can immediately claim assets under $20,000 using the instant tax write-off.
- More expensive assets are usually claimed over time.
- The method you choose depends on cost, eligibility, and whether the asset is ready for use.
Contents
- What is asset depreciation?
- What assets can be depreciated?
- How does depreciation work for tax?
- What depreciation methods can small businesses use?
- How does the instant asset write-off affect depreciation?
- Is temporary full expensing still available?
- How does private use affect asset depreciation?
- How are vehicles depreciated?
- What records should small businesses keep?
- Common asset depreciation mistakes
- When should you speak to an accountant?
- FAQs
What is asset depreciation?
Asset depreciation is the process of claiming a tax deduction for the decline in an asset’s value over time.
It applies to depreciating assets used in your business. These items have a limited effective life and are expected to wear out, become obsolete, or lose value.
Common examples include: computers, tools, machinery, and other more costly assets.
The deduction you can claim depends on how much the asset is used for business purposes. If there is any private use, you must exclude or apportion that part.
What assets can be depreciated?
Many everyday business assets qualify for depreciation. These typically include:
- Computers, laptops, phones and tablets
- Tools and machinery
- Office furniture
- Business vehicles
- Café or kitchen equipment
- Point-of-sale systems and security equipment
- Fit-out items and, in some cases, software
However, not everything your business buys is a depreciating asset. It’s important to distinguish these from other categories:
- Trading stock, which is held for resale
- Land, which does not depreciate
- Capital works, such as buildings and structural improvements
- Private assets
- Day-to-day operating expenses that are immediately deductible
Here’s a quick reference table:
| Item | Depreciating asset? | Notes |
|---|---|---|
| Laptop used for business | Usually yes | Private use may need to be apportioned |
| Office chair | Usually yes | May qualify for immediate deduction if under the threshold |
| Stock for resale | No | Trading stock rules apply |
| Building extension | Usually no | May fall under capital works |
| Work vehicle | Usually yes | Car limit and business-use rules may apply |
| Software subscription | Depends | Some subscriptions may be immediately deductible |
How does depreciation work for tax?
Depreciation allows your business to claim a deduction for the decline in value of an asset. This deduction reduces your taxable income, which can lower the amount of tax you pay.
It’s important to understand that depreciation is not a refund of the purchase price. Instead, it spreads the deduction over time unless specific rules allow an immediate write-off.
The timing of your deduction depends on the method used. Larger or more expensive assets are typically claimed over several years, while eligible small businesses may use simplified depreciation rules.
What depreciation methods can small businesses use?
The ATO allows two main methods for calculating depreciation: the diminishing value method and the prime cost method. Let’s take a closer look at both.
Diminishing value method
This method assumes that the asset loses more value in its early years. You calculate the deduction as a percentage of the asset’s remaining value each year, resulting in higher deductions initially that decrease over time.
Formula: Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)
Example: An asset costing $80,000 with an effective life of 5 years:
First-year deduction = $80,000 × (365/365) × (200% ÷ 5) = $80,000 × 40% = $32,000
Prime cost method (straight-line)
This method spreads the cost evenly over the asset’s effective life, resulting in equal deductions each year.
Formula: Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)
Example: Same $80,000 asset over 5 years:
Annual deduction = $80,000 × (365/365) × (100% ÷ 5) = $16,000 per year
Simplified depreciation approaches
Beyond standard depreciation methods, small businesses have other options, summarised in the table below.
| Method | How it works | Who it may suit |
|---|---|---|
| Instant asset write-off | Immediate deduction for eligible assets below the threshold | Small businesses are buying lower-cost assets |
| Small business pool | Assets grouped and depreciated at set rates | Businesses with higher-cost assets |
| General depreciation rules | Deduction spread over the effective life | Businesses outside the simplified system |
| Capital works deductions | Structural costs claimed over time | Businesses with buildings or fit-outs |
The right method for your situation depends on your business size and eligibility, the asset type and value, among other factors.
How does the instant asset write-off affect depreciation?
The instant asset write-off allows eligible small businesses to immediately deduct the cost of certain assets, rather than depreciating them over time.
For the 2025–26 income year, the threshold is $20,000 per asset, and eligibility generally requires aggregated turnover under $10 million. The threshold applies to each asset, not your total annual spend.
To qualify, the asset must be first used or installed and ready for use within the relevant timeframe. Additionally, if you partly use the asset for private purposes, you can only claim the business-use portion.
For example, if you purchase a $3,000 laptop and use it 80% for business, you may be able to claim a $2,400 deduction in that year.
What happens to assets that cost $20,000 or more?
Assets that cost $20,000 or more are not eligible for the instant asset write-off.
Instead, eligible small businesses that use simplified depreciation can generally place these assets in a small business pool. The pool is then depreciated at:
- 15% in the first income year
- 30% in each subsequent year
Only the business-use portion of the asset is included in the pool. Some assets may be excluded or subject to specific tax rules.
What did the 2026 Budget announce about the instant asset write-off?
The 2026–27 Federal Budget announced that the $20,000 instant asset write-off will be made permanent.
This is significant because the threshold had previously been extended multiple times on a temporary basis. At the time of writing, the measure should be treated as announced and subject to legislation.
Businesses should confirm the current law before making tax planning decisions.
What does “installed and ready for use” mean?
To claim depreciation, an asset must generally be first used or installed ready for use in the relevant income year.
This means that simply purchasing or paying for an asset is not enough. If there are delays in delivery, installation or setup, your claim may need to be deferred to the next financial year.
This rule is particularly important when making end-of-financial-year purchases, where timing mistakes are common.
Is temporary full expensing still available?
Temporary full expensing allowed businesses to immediately deduct eligible assets during a limited period, but it ended on 30 June 2023.
It should not be treated as a current option. If your business used it in previous years, you should retain appropriate records. However, for current asset purchases, you need to apply the instant asset write-off, simplified depreciation, or general depreciation rules.
How does private use affect asset depreciation?
If you use an asset for both business and personal purposes, you can only deduct the business portion.
This commonly applies to laptops, mobile phones, vehicles and home office equipment. You must calculate a reasonable business-use percentage and keep records to support your claim.
How are vehicles depreciated?
Vehicles are treated as depreciating assets, but they come with additional rules.
- Car limit rules may cap the value used for depreciation
- Private use must be apportioned
- Logbooks or usage records are often required
- Luxury car and passenger vehicle rules may apply
Because of these complexities, vehicles often require more careful treatment than smaller assets.
What records should small businesses keep?
Accurate record-keeping is essential to support your depreciation claims. You should retain:
- Invoices and purchase contracts
- Payment and delivery records
- Installation and setup records
- Asset register and depreciation schedule
- Business-use calculations
- Logbooks for vehicles
- GST treatment documentation
- Disposal or sale records
- Repair and maintenance records
Failing to do so may invalidate your claims.
Common asset depreciation mistakes
Navigating asset depreciation can be challenging, but there are several common mistakes that you can easily avoid. By recognising the following mistakes and implementing practical solutions, you can mitigate costly errors, maximise your depreciation claims, and remain compliant with Australian tax laws.
Mistake 1: Claiming depreciation on assets used mainly for personal purposes
One of the most common errors small business owners make is claiming depreciation on assets that are primarily used for personal purposes.
For example, if you purchase a laptop that you use 60% for business and 40% for personal activities, you can only claim depreciation on the 60% business-use portion. Claiming the full depreciation amount would be incorrect and could trigger an ATO audit.
Solution: Keep detailed records of how and when you use each asset. If an asset is mixed-use, calculate your depreciation claim based only on the percentage of business use.
Mistake 2: Failing to keep receipts or proper records
Failing to keep purchase receipts, tax invoices, or documentation showing business use is a common and costly mistake. Without proper records, the ATO may disallow your depreciation claims or impose penalties during an audit.
Solution: Maintain organised records for every asset on which you claim depreciation. This includes purchase invoices, proof of payment, and documentation of business use. Use digital storage solutions or accounting software to keep these records safe and easily accessible.
Mistake 3: Thinking a write-off means the asset is free
One of the most common misconceptions is that claiming a write-off means the asset costs the business nothing. In reality, depreciation and instant write-offs only reduce your taxable income; they do not reimburse the full purchase price.
For example, if you buy a $10,000 asset, you still pay $10,000 upfront. The tax deduction simply reduces the amount of income you are taxed on.
Solution: Factor in the real cash cost of the asset when making purchasing decisions. Treat depreciation as a tax benefit, not a refund.
Mistake 4: Claiming assets that are not yet installed or ready for use
A frequent EOFY mistake is assuming that purchasing or paying for an asset is enough to claim it. However, the asset must be installed and ready for use in the relevant income year.
For example, if equipment is delivered after 30 June or is still awaiting installation, the deduction may need to be claimed in the following financial year.
Solution: Ensure assets are operational or ready for use before EOFY if you intend to claim them that year. Keep records of delivery and installation dates.
Mistake 5: Treating trading stock as a depreciating asset
Some businesses incorrectly attempt to depreciate items that are actually trading stock. Trading stock is held for resale and is subject to different tax rules.
For example, a retailer cannot depreciate products held for sale, even if they lose value over time.
Solution: Clearly distinguish between assets used in the business and items held for resale. Apply trading stock rules where appropriate.
Mistake 6: Applying ordinary depreciation to capital works
Buildings, renovations, and structural improvements are often mistakenly treated as standard depreciating assets. These items usually fall under capital works rules and are claimed over a longer period.
For example, a shop fit-out involving structural changes may not qualify for immediate depreciation.
Solution: Identify whether an expense relates to capital works and apply the correct deduction method. Seek advice if the classification is unclear.
Mistake 7: Assuming temporary full expensing still applies
Some business owners continue to rely on outdated information and assume temporary full expensing is still available. This measure ended on 30 June 2023 and is no longer available.
Mistake 8: Overlooking that assets above $20,000 can still be claimed over time
Many business owners assume that if an asset doesn’t qualify for the instant asset write-off, they can’t deduct it at all. In reality, higher-cost assets can still be claimed over time.
Solution: Consider all available depreciation methods. Even if an immediate deduction is not available, the asset may still provide tax benefits over multiple years.
When should you speak to an accountant?
If you are unsure how to treat an asset or which method applies, it is worth getting professional advice before lodging your return.
Lawpath’s accountants can help you review asset purchases, apply the correct depreciation method and ensure your EOFY tax position is accurate and compliant.
FAQs
What is asset depreciation?
Asset depreciation is the process of claiming a deduction for the decline in value of a business asset over time.
Can small businesses immediately deduct assets?
Yes, if the asset costs under $20,000 and the eligibility criteria are met.
What happens if an asset costs $20,000 or more?
It is usually either depreciated over time or added to a small-business pool.
Is temporary full expensing still available?
No, it ended on 30 June 2023.
Does a depreciation deduction mean I get the full cost of the asset back?
No, it reduces your taxable income rather than refunding the full cost.
Can I depreciate an asset I use partly for personal reasons?
Yes, but only the business-use portion is deductible.
What records do I need for asset depreciation?
You should keep invoices, usage records and depreciation schedules to support your claims.
