What is Depreciation and How to Claim It
Do you own or use assets for your work or business, such as a car, a computer or a machine? If yes, you may be able to claim a tax deduction for the decline in value of these assets over time. This deduction is called depreciation and it can help you reduce your taxable income and increase your tax return.
What is depreciation?
Depreciation is the decrease in value of an asset due to wear and tear, age or obsolescence. Depreciation reflects the fact that an asset loses some of its usefulness and value as it is used over time.
How to claim depreciation?
To claim depreciation, you need to follow the rules and methods set by the ATO for different types of assets. These rules and methods are called capital allowances and they determine how much you can claim each year based on the asset's effective life, cost and usage.
There are two main methods to calculate depreciation: the prime cost method and the diminishing value method. The prime cost method assumes that the asset declines in value evenly over its effective life. The diminishing value method assumes that the asset declines in value more in the earlier years of its effective life.
You can choose either method depending on your situation and preference, but you must stick to the same method for the same asset for its entire effective life.
Example of depreciation calculation
Let's say you bought a laptop for $2,000 in July 2023 and you use it 80% for work purposes. The laptop has an effective life of four years. You can claim depreciation using either method as follows:
- Prime cost method: You can claim 25% of the asset's cost each year, multiplied by the percentage of work use. Your annual depreciation deduction is $2,000 x 25% x 80% = $400.
- Diminishing value method: You can claim a higher percentage of the asset's remaining value each year, multiplied by the percentage of work use. Your annual depreciation deduction is calculated as follows:
| Year | Asset's remaining value | Depreciation rate | Depreciation amount |
| 1 | 2,000 | 37.5% | 2,000 x 37.5% x 80% = $600 |
| 2 | 1,400 | 37.5% | 1,400 x 37.5% x 80% = $420 |
| 3 | 980 | 37.5% | 980 x 37.5% x 80% = $294 |
| 4 | 686 | 37.5% | 686 x 37.5% x 80% = $206 |
Depreciation is a useful tax deduction that can help you recover some of the cost of your assets over time. To claim depreciation, you need to follow the ATO rules and methods and keep records of your assets and expenses.
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