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    Depreciation and Instant Asset Write-Off

    The $20,000 instant asset write-off, simplified depreciation pool, general Division 40 rules, car depreciation limit, capital works under Division 43, software assets, and balancing adjustments for Australian small businesses.

    Small business entities with aggregated turnover under $10 million using simplified depreciation can immediately deduct the business portion of eligible depreciating assets costing less than $20,000 each for the 2025-26 income year. Assets at or above that threshold enter the small business pool, depreciating at 15% in the first year and 30% thereafter. The car depreciation limit for 2025-26 is $69,674 for passenger vehicles, and capital works (buildings and structural improvements) are written off at 2.5% per year under Division 43, not eligible for instant write-off.

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    Instant asset write-off: $20,000 threshold

    For the 2023-24 through 2025-26 income years, eligible small business entities that choose the simplified depreciation rules in Division 328 can immediately deduct the business portion of depreciating assets costing less than $20,000 each (ex-GST if registered for GST, or GST-inclusive if not registered). The threshold is per asset, not per year. Assets must be first used or installed ready for use for a taxable purpose within the relevant income year.

    Eligible businesses

    Aggregated turnover under $10 million and using the simplified depreciation rules in Division 328 of the ITAA 1997. The usual lock-out preventing re-entry to simplified depreciation after opting out is suspended through 30 June 2026, so businesses can adopt or re-adopt these rules during this period.

    Eligible assets

    Depreciating assets used mainly in the business: new or second-hand. Includes tools, equipment, furniture, technology, and vehicles below the threshold. The threshold also applies to qualifying 'second element' cost additions under $20,000 to assets previously written off under IAWO.

    Simplified depreciation pool

    Assets costing $20,000 or more that are otherwise ineligible for instant write-off enter the small business pool. The pool applies to small business entities (aggregated turnover under $10 million) using Division 328 simplified depreciation.

    Pool mechanics

    Deduction is 15% of the taxable-use cost in the year the asset is first used or installed, then 30% of the pool's opening balance in each subsequent year on a declining-balance basis. For 2025-26, if the closing pool balance (before the final deduction) falls below $20,000, the entire remaining pool can be written off in that year.

    General depreciation under Division 40

    Entities not using simplified small-business rules fall back on Division 40 'uniform capital allowance' rules. Depreciation is based on the asset's effective life, which can be self-assessed or taken from the Commissioner's determination in the Effective Life of Depreciating Assets Determination 2025.

    Choosing a method

    Prime cost (straight-line): 100 divided by effective life, producing even annual deductions. Diminishing value: 200 divided by effective life (for assets acquired after 10 May 2006), applied to the remaining written-down value, producing higher deductions in early years. The choice is irrevocable for each asset. Diminishing value generally produces higher upfront deductions, which suits most self-employed taxpayers looking to reduce near-term tax.

    Car depreciation limit

    Division 40 imposes a cap on the depreciable amount for passenger vehicles. For 2025-26, the car limit is $69,674. This applies to cars designed to carry fewer than 9 passengers and with less than 1 tonne payload capacity.

    Which vehicles are affected

    Standard passenger vehicles, sedans, most SUVs, and dual-cab utes with under 1-tonne payload. Does not apply to motorcycles, vehicles with payload capacity of 1 tonne or more, or vehicles designed to carry 9 or more passengers. Those larger vehicles are treated as plant without the luxury car cap and depreciate on full cost.

    Interaction with business-use percentage

    Calculate decline in value up to the car limit ($69,674), then apply your business-use percentage to determine the deductible portion. GST input tax credits on cars are similarly limited where the car limit applies.

    Capital works deductions under Division 43

    Buildings and structural improvements generally do not qualify for instant write-off and are instead written off under Division 43 over their useful life. The deduction only applies while the property produces assessable income.

    What qualifies

    Construction cost of buildings, structural improvements, extensions, alterations, and fixed fixtures forming part of the structure (walls, concrete slabs, built-in joinery). Does not include land acquisition cost or demolition of existing structures (beyond limited exceptions). Division 43 and Division 40 operate as separate deduction streams: you cannot depreciate capital works again as plant.

    Software and digital assets

    Software you develop, purchase, or commission for internal business use is typically given an effective life of 5 years (20% per year prime cost or diminishing value at the same effective life). Off-the-shelf software often has a shorter effective life of 2 to 4 years. Recurring subscription costs are generally deductible outright as operating expenses rather than depreciated. Website development is usually capital in nature for the initial build (treated as in-house software) but ongoing costs such as hosting, domain renewals, and content updates are operating expenses deductible in the year incurred.

    Balancing adjustments on disposal

    When a depreciating asset subject to Division 40 is disposed of, you compare its termination value (usually sale proceeds or insurance payout) with its adjustable value (tax written-down value). If the termination value exceeds the adjustable value, the excess is assessable income. If the termination value is less, the shortfall is an additional deduction.

    Pooled assets

    For small business pools, disposals adjust the pool balance rather than creating a separate balancing adjustment, except where the pool is being fully written off. Involuntary disposal rollovers (insurance replacements) may defer some or all of the balancing adjustment. Small business restructure rollovers under Division 328 allow certain transfers between entities in a genuine restructure without triggering immediate adjustments.

    Worked example: tradesperson's asset purchases in 2025-26

    Sienna, a GST-registered sole trader painter in Wollongong, uses simplified depreciation. All assets are used more than 50% for business.

    Statute references

    • Income Tax Assessment Act 1997 Division 40 (decline in value, balancing adjustments, car limit)
    • Income Tax Assessment Act 1997 Division 43 (capital works deductions)
    • Income Tax Assessment Act 1997 Division 328 Subdivision 328-D (simplified depreciation for small business)
    • Income Tax Assessment Act 1997 Division 328 Subdivision 328-G (small business restructure rollovers)
    • Income Tax Assessment Act 1997 s 40-230 (car depreciation limit)
    • Effective Life of Depreciating Assets Determination 2025

    Frequently asked questions

    Can I use the instant asset write-off for a vehicle?+
    Yes, provided the vehicle costs less than $20,000 (ex-GST if registered) and you are a small business entity using simplified depreciation. A ute with payload capacity of 1 tonne or more is not subject to the car depreciation limit, so the full cost is eligible for IAWO if under $20,000. For passenger vehicles, the car limit of $69,674 still applies to restrict the depreciable amount, but most vehicles under $20,000 sit well below this cap. The business-use percentage applies: if the vehicle is 80% business use, you claim 80% of the cost.
    What happens to the instant asset write-off after 30 June 2026?+
    The $20,000 threshold is legislated through 30 June 2026. After that date, the threshold is expected to revert to a lower amount (historically $1,000) unless the government extends or replaces the measure. Assets purchased and first used after 30 June 2026 would need to be depreciated through the small business pool or under general Division 40 rules at whatever threshold applies at that time.
    Can I claim capital works (building improvements) under the instant write-off?+
    No. Capital works under Division 43 (buildings, structural improvements, extensions, fixed fixtures forming part of the structure) are not eligible for the instant asset write-off. They are written off separately at 2.5% per year (40 years) for most post-1987 buildings, or 4% per year (25 years) for certain industrial and manufacturing buildings. The write-off only applies while the property produces assessable income.
    What is the difference between prime cost and diminishing value depreciation?+
    Prime cost (straight-line) divides the cost evenly over the asset's effective life: 100 divided by effective life gives the annual percentage. Diminishing value (double-declining) uses 200 divided by effective life, applied to the remaining value each year, producing higher deductions early and lower deductions later. Once you choose a method for a particular asset, the choice is irrevocable. For assets acquired after 10 May 2006, the diminishing value formula uses a 200% multiplier.

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