Expenses deductible over a number of income years

Deduction for decline in value of depreciating assets

You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. However, your deduction is reduced to the extent your use of the asset is for other than a taxable purpose. If you own a rental property, the taxable purpose will generally be for the purpose of producing assessable income.

Some items found in a rental property are regarded as part of the setting for the rent-producing activity and are not treated as separate assets in their own right. However, a capital works deduction may be allowed for some of these items, see Capital works deductions.

How do you work out your deduction?

Use prime cost or diminishing value method?

Both methods are based on the effective life of the asset. The best outcome can be chosen by the taxpayer.

Diminishing value method

The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

For depreciating assets you started to hold on or after 10 May 2006, you generally use the following formula for working out decline in value using the diminishing value method:

The cost base happened in an income year in which an asset is first used or installed ready for use for any purpose, the base value is the asset’s cost. For a later income year, the base value is the asset’s opening adjustable value plus any amounts included in the asset’s second element of cost for that year.

For depreciating assets you started to hold prior to 10 May 2006, the formula for working out decline in value using the diminishing value method is:

For the income year in which an asset is first used or installed ready for use for any purpose, the base value is the asset’s cost. For a later income year, the base value is the asset’s opening adjustable value plus any amounts included in the asset’s second element of cost for that year.

An asset’s cost has two elements.

The first element of cost is, generally, amounts you are taken to have paid to hold the asset, such as the purchase price.

The second element of cost is, generally, the amount you are taken to have paid to bring the asset to its present condition, such as the cost of capital improvements to the asset. If more than one person holds a depreciating asset, each holder works out their deduction for the decline in value of the asset based on their interest in the asset and not on the cost of the asset itself.

The adjustable value of a depreciating asset is its cost (first and second elements) less its decline in value up to that time. Adjustable value is similar to the concept of undeducted cost used in the former depreciation provisions. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

The prime cost method

It assumes that the value of a depreciating asset decreases uniformly over its effective life. The formula for working out decline in value using the prime cost method is:

The formula under the prime cost method may have to be adjusted if the cost, effective life or adjustable value of the asset is modified. For more information, see the ATO Guide to depreciating assets 2014. 

Under either the diminishing value method or the prime cost method, the decline in value of an asset cannot amount to more than its base value.

If you use a depreciating asset for other than a taxable purpose (for example, you use the same lawn mower at both your rental property and your private residence) you are allowed only a partial deduction for the asset’s decline in value, based on the percentage of the asset’s total use that was for a taxable purpose.

Effective life

Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose, or for the purpose of producing exempt income or non-assessable non-exempt income:

having regard to the wear and tear you reasonably expect from your expected circumstances of use

assuming that it will be maintained in reasonably good order and condition, and

having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

Effective life is expressed in years, including fractions of years. It is not rounded to the nearest whole year.

For most depreciating assets you can choose to work out the effective life yourself or to use an effective life determined by the Commissioner of Taxation.

The sort of information you could use to make an estimate of effective life of an asset is listed in the Guide to depreciating assets 2014.

Effective life of depreciating assets (TR 2013/4) is applicable from 1 July 2013

Because the Commissioner often reviews the determinations of effective life, the determined effective life may change from the beginning of, or during, an income year. You need to work out which Taxation Ruling, or which schedule accompanying the relevant Taxation Ruling to use for a particular asset’s determined effective life.

As a general rule, use the ruling or schedule that is in force at the time you:

entered into a contract to acquire the depreciating asset

otherwise acquired it, or

started to construct it.

Immediate Deduction

Immediate deduction for certain non-business depreciating assets costing $300 or less

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it for a taxable purpose during the income year in which the deduction is available.

The immediate deduction is available if all of the following tests are met in relation to the asset:

it cost $300 or less

you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business)

it was not part of a set of assets costing more than $300 that you started to hold in the income year, and

it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300.

If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, you can claim the immediate deduction even though the depreciating asset in which you have an interest cost more than $300; see Partners carrying on a rental property business.

Example 16: Immediate deduction

In November 2013, Terry purchased a toaster for his rental property at a cost of $70. He can claim an immediate deduction as he uses the toaster to produce assessable income, provided he is not carrying on a business from the rental activity.

Example 17: No immediate deduction

Paula is buying a set of four identical dining room chairs costing $90 each for her rental property. She cannot claim an immediate deduction for any of these because they are identical, or substantially identical, and the total cost is more than $300.

For more information about immediate deductions for depreciating assets costing $300 or less, see the Guide to depreciating assets 2014.

Low-value pooling

You can allocate low-cost assets and low-value assets relating to your rental activity to a low-value pool. A low-cost asset is a depreciating asset whose cost is less than $1,000 (after GST credits or adjustments) as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose.

A low-value asset is a depreciating asset that is not a low-cost asset and:

that has an opening adjustable value for the current year of less than $1,000, and

for which you have worked out any available deductions for decline in value under the diminishing value method.

Your share of interest is less than $1000:

If you hold an asset jointly with someone and the cost of your interest in the asset or the opening adjustable value of your interest is less than $1,000, you can allocate your interest in the asset to your low-value pool.

Note: Once you choose to create a low-value pool and allocate a low-cost asset to it, you must pool all other low-cost assets you start to hold in that income year and in later income years. However, this rule does not apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.

Once you have allocated an asset to the pool, it remains in the pool.

Once an asset is allocated to a low-value pool, only one annual calculation for the decline in value for all of the depreciating assets in the pool is required.

For the first year, its decline in value at a rate of 18.75%, or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year and eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool.

The deduction for the decline in value of depreciating assets in a low-value pool using a diminishing value rate of 37.5%.