AdvisorCorp

Depreciation for tax purpose

Delta Team
10.12.2020 17:52 Comment(s)

Depreciation for tax purpose

What is tax depreciation?

Generally, you can’t claim an immediate tax deduction on capital assets such as a car, plant and equipment, property, etc. Instead, you need to write off the cost over a period of time. This tax-deductible write-off is called depreciation.


Not all capital assets are eligible for tax depreciation, for example, land, trading stock and some intangible assets. The eligible one has a limited effective life and can reasonably be expected to decline in value over the time it's used.

Depreciation deduction applies if you use eligible capital assets to earn assessable income, including:

  • Individual taxpayers earning employment income 

  • Rental property investors and commercial property tenants

  • Small and large businesses

Depreciation for Individual Taxpayers earning employment income

Immediate deductions can be claimed for assets that cost under $300. Such assets may include tools, briefcases, computer equipment and technical books. Assets costing $300 or more that are used for an income-producing purpose can be written off over its effective life. You can only claim depreciation to the extent that the asset is used for work. If the asset is also used for private or domestic purposes, you’ll need to apportion the depreciation charge and can only claim the work-related element.

Depreciation for rental property investors and commercial property tenants

Over time, your investment property will experience wear and tear. The Australian Taxation Office allows rental property investors to claim this tax deduction. It is generally the second biggest tax deduction after interest.

Depreciation deductions for rental properties can be claimed under two categories:

  • Division 43: Capital works deductions

  • Division 40: Plant and equipment depreciation 

Div 43 Capital works deduction refers to the building’s structure and items considered to be permanently fixed to the property such as kitchen cupboards, doors and sinks. This deduction depends on the age and type of qualified properties. Usually, 2.5% of a residential property’s historical construction cost or estimated cost can be claimed each lease year.

Div 40 plant and equipment depreciation refers to the assets which are easily removable from the property such as carpet, blinds and hot water systems. Each plant and equipment item has an effective life set by the Australian Taxation Office, and the depreciation deduction is calculated based on this effective life.

A tenant can also claim depreciation on the assets they own when they rent a commercial property. And another process called scrapping allows tenants to claim the asset’s residual value as an immediate tax deduction when they remove their assets from the commercial property at the end of their tenancy.

Depreciation for small business

You can choose to use the simplified depreciation rules if you have a small business with an aggregated turnover of less than $10 million.

Simplified depreciation rules for small businesses include:

  • an instant asset write-off for assets that cost less than the relevant threshold
  • a general small business pool for assets that cost the same or more than the relevant threshold, which has simplified calculations to work out the depreciation deduction

As part of the COVID-19 stimulus package, the Federal Budget 2020-21 extended the instant asset write-off threshold from $150,000 to unlimited. So if you have a small business, you can write off all assets immediately which were purchased after 7.30 pm (AEDT) 6 October 2020. Please refer to the table below for detailed information.

Instant asset write-off

Pre COVID-19 stimulusCOVID- 19 stimulusOct 2020-21 Budget
 7.30pm (AEDT) 2 April
2019 – 11 March 2020
12 March 2020 – 7.30pm
(AEDT) 6 October 2020
7.30pm (AEDT) 6 October
2020 – 30 June 2022
Aggregated turnoverUnder $10 millionUnder $10 millionUnder $10 million
ThresholdUp to $30,000 Up to $150,000 No threshold – full expensing
Eligible AssetNew and second-hand assetsNew and second-hand

assets. First use or installed by 30 June 2021

 New and second-hand assets. First use or installed by 30 June 2022

Simplified small business pool

Pre COVID-19 stimulusCOVID- 19 stimulusOct 2020-21 Budget
 7.30pm (AEDT) 2 April
2019 – 11 March 2020
12 March 2020 – 7.30pm
(AEDT) 6 October 2020
7.30pm (AEDT) 6 October
2020 – 30 June 2022
Aggregated turnoverUnder $10 millionUnder $10 millionUnder $10 million
Threshold$30,000 and over$150,000 and over-
Eligible Asset
Assets $30,000 and over can be placed in the SBE simplified small business pool.
Assets $150,000 and over can be placed in the SBE simplified small business pool. If the balance below $150,000 on 30 June 2020 deduct in full.
Deduct balance of simplified depreciation pool at the end of the income year while full expensing applies.

This article is general in nature and anyone intending to apply the information to practical circumstances should contact us for professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Book a consultation