Capital Allowances – Depreciation


Assets lose value over their effective life

The effective life of a business asset is usually limited and the asset can reasonably be expected to decrease in value (depreciate) over its useful life.

Land, trading stock and most intangible assets (excluding exceptions such as Intellectual Property and in-house software) are not depreciating assets.

The ATO has enacted a “Uniform Capital Allowance” (UCA) system which provides a set of general rules that apply across a variety of depreciating assets and certain other expenditure. They provide a mechanism that taxpayers can use to deduct certain capital expenditure over time, including expenditure on the acquisition of capital assets.

Two ways to calculate the depreciation tax deduction

There are two options for calculating the decline in the value of an asset under the UCA system:

  1. Prime cost method – The decline in value is calculated as a % of the initial cost of the asset and is a rate that looks to write the asset off over its useful economic life.
  2. Diminishing value method – The decline in value for each income year is calculated on the balance of the asset’s cost that remains after the depreciation for previous income years has been considered.

The ATO allows recalculation of the effective life of an asset if the circumstances of its use change and the effective life initially chosen is no longer accurate.

An improvement to an asset that increases its cost by 10% or more in a year may oblige you to recalculate the effective life of the asset.

The decline in value of certain depreciating assets with a cost or opening written down value of less than $1,000 can be calculated through a Low-Value Pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.

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