Your ute, laptop and workshop tools all wear out. The tax system lets you deduct that decline in value, but only for the right kinds of assets, over the right period and using the right method.
This guide explains what counts as a depreciating asset, how effective life works, the two calculation methods, the low-value pool and the simpler rules for small businesses in 2025-26 and 2026-27. Figures were checked against the ATO’s Guide to depreciating assets 2025 and its small business depreciation pages.
It is written for sole traders, small business owners and anyone holding assets to earn income. If you mainly want the immediate write-off rules, go to our instant asset write-off guide for 2026.
Key takeaways
- A depreciating asset has a limited effective life and is expected to decline in value. Land and trading stock never qualify.
- You can use the Commissioner’s effective life or your own reasonable estimate; in-house software is fixed at 5 years.
- Diminishing value uses 200% / effective life; prime cost uses 100% / effective life.
- Small businesses under $10 million turnover can write off assets costing less than $20,000, which the ATO says is permanent from 1 July 2026.
- The small business pool is depreciated at 15% in the first year and 30% after that.
- The car limit is $69,674 for 2025-26 and $69,883 for 2026-27.
Depreciating assets at a glance
| Rule | General depreciation rules | Small business simplified depreciation |
|---|---|---|
| Who | Any taxpayer holding an asset for income | Aggregated turnover under $10 million |
| Cheaper assets | Low-value pool for assets under $1,000 (18.75% then 37.5%) | Immediate write-off for assets under $20,000 each |
| Other assets | Effective life, prime cost or diminishing value | Small business pool: 15% first year, 30% later |
| Employees and investors | Items $300 or less claimed in full | Not available |
| Cars | Cost capped at the car limit | Car limit still applies |
Source: ATO low-value pools, ATO simpler depreciation for small business, ATO instant asset write-off, ATO new legislation: $20,000 IAWO, checked 9 October 2026.
What is a depreciating asset?
The ATO defines it as an asset with a limited effective life that can reasonably be expected to decline in value while it is used. You claim the decline in value only to the extent you use the asset to earn assessable income.
Most intangible assets are excluded. The exceptions listed on the ATO’s what is a depreciating asset page include in-house software, patents, registered designs, copyrights and certain licences.
| Category | Depreciating asset examples | Not depreciating assets |
|---|---|---|
| Vehicles and equipment | Utes, vans, trucks, forklifts, tools of trade | – |
| Technology | Laptops, servers, in-house software | Software in a development pool is treated separately |
| Office | Desks, chairs, printers, phones | – |
| Property | Plant in a building, such as air conditioners and carpets | Land; the building itself (capital works) |
| Other | Patents, registered designs, copyrights | Trading stock, goodwill and most other intangibles |
Buildings and structural improvements are not depreciating assets. They are claimed as capital works, explained in our Division 43 capital works guide. For property investors, see our rental property depreciation guide.
How does effective life work?
Effective life is how long the asset can be used to earn income. For most assets you choose between:
- The Commissioner’s determination, which assumes the asset is new and reflects general industry use. The current determinations are in LI 2025/20.
- Your own estimate, based on how you will actually use the asset. Keep notes of how you worked it out.
A few rules override your choice. Some vehicles, buses, trucks and trailers have statutory caps. In-house software has a fixed 5-year life, and a standard patent 20 years. Details are on the ATO’s effective life page. Do not round effective life to whole years.
Prime cost or diminishing value: which method?
- Prime cost: cost x (days held / 365) x (100% / effective life). The same deduction each year.
- Diminishing value: base value x (days held / 365) x (200% / effective life). Larger deductions early, smaller later.
You pick a method per asset. Diminishing value suits assets that lose value fast, such as technology. Prime cost suits steady-life equipment where you want predictable deductions.
Worked example: an $8,000 coffee machine
Lena runs a café through a company with turnover above $10 million, so the general rules apply. She buys an $8,000 coffee machine and starts using it on 1 July 2025. For this example, assume an effective life of 5 years.
Prime cost, 2025-26: $8,000 x 365/365 x 100%/5 = $1,600. She claims $1,600 each year for five years.
Diminishing value, 2025-26: $8,000 x 365/365 x 200%/5 = $3,200. In 2026-27 the base is $8,000 – $3,200 = $4,800, so the deduction is $4,800 x 40% = $1,920.
If the café were a small business using simplified depreciation, the $8,000 cost is under $20,000, so the business portion could be deducted in full in 2025-26.
What is the low-value pool?
Under the general rules, a low-cost asset is one costing less than $1,000. Once you create a low-value pool and put a low-cost asset in it, all later low-cost assets must go in too. The pool rate is 37.5%, with new low-cost assets claimed at 18.75% in their first year. You include only the estimated taxable use percentage of each asset. The ATO’s low-value pools page sets out the rules.
Employees and investors have a separate shortcut: an item costing $300 or less used mainly to earn non-business income can be claimed in full, unless it is part of a set costing more.
How does small business pooling work?
If your aggregated turnover is under $10 million and you use the simplified depreciation rules:
- Assets costing less than $20,000 are written off immediately under the instant asset write-off. The limit applies per asset.
- Assets costing $20,000 or more go into the general small business pool: 15% in the first year, 30% each year after.
- If the pool balance at year end is under $20,000, it is written off in full.
- The lock-out rule is suspended until 30 June 2027, so businesses that opted out can come back in.
Capital works, assets leased out more than 50% of the time, R&D assets, horticultural plants and software in a development pool are excluded. Our earlier instant asset write-off 2025-26 article covers the timing rules in more detail.
Rule of thumb: Check turnover first. Under $10 million, most assets under $20,000 can be written off this year; at $10 million or more, every asset needs an effective life and a method.
What records do I need?
- Purchase invoice showing cost, date and supplier
- Date first used or installed ready for use
- Effective life chosen and why, plus the method
- Business-use percentage and a logbook for vehicles
- Sale or disposal date and proceeds
When you sell or stop using an asset, a balancing adjustment applies: proceeds above the adjustable value are assessable, and a shortfall is deductible. See the ATO’s balancing adjustment rules. If records are missing, read our guide to claiming deductions without receipts.
Common mistakes with depreciating assets
- Claiming land or trading stock: neither is a depreciating asset.
- Ignoring private use: only the business-use share is claimable.
- Treating buildings as plant: structures are capital works at 2.5% or 4%.
- Exceeding the car limit: cost above $69,674 (2025-26) cannot be depreciated.
- Forgetting balancing adjustments: a sale can create assessable income.
For other claims beyond depreciation, see our small business tax deductions guide.
FAQ about assets that depreciate
What makes something a depreciating asset?
The ATO describes a depreciating asset as an asset with a limited effective life that can reasonably be expected to decline in value while it is used. Vehicles, computers, tools and machinery are typical examples. Land and trading stock are specifically excluded, and most intangible assets are excluded too, apart from listed items such as in-house software, patents, registered designs and copyrights.
Do I have to use the ATO’s effective life?
No. For most assets you can use the Commissioner’s effective life determination or work out your own reasonable estimate based on how you will use the asset. You make the choice for the year the asset’s start time occurs, generally by the time you lodge that return. Some vehicles and other assets have statutory caps, and in-house software is fixed at 5 years.
Should I choose prime cost or diminishing value?
Diminishing value gives bigger deductions in the early years, which suits assets that lose value quickly. Prime cost gives an even deduction each year, which makes budgeting simpler. You can choose a method for each asset, but once chosen for an asset you generally stick with it. Small businesses using simplified depreciation use the write-off and pool rules instead.
Can a small business write off assets immediately?
Yes, if aggregated turnover is under $10 million and the business uses simplified depreciation. Assets costing less than $20,000 each can be written off in the year they are first used or installed ready for use. The ATO says the $20,000 limit is permanent from 1 July 2026. More expensive assets go into the small business pool at 15% then 30%.
What happens when I sell a depreciating asset?
A balancing adjustment applies. If the sale price (termination value) is more than the asset’s adjustable value, the excess is assessable income. If it is less, you can deduct the difference. For assets with some private use, the adjustment is reduced to the taxable use portion, and a capital gain or loss may arise on the private portion.
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This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO Guide to depreciating assets 2025, simpler depreciation, instant asset write-off, new legislation and car threshold pages on 9 October 2026. Rates and thresholds change, so confirm the current position before acting.
