Depreciation

Depreciation (Definition)

Depreciation is a tax deduction that lets businesses claim a yearly expense for the loss in value of assets used to earn income. A "depreciation loss" is deductible under DA 1(1), even though the asset itself is capital in nature.

Subpart EE Overview

Depreciation rules are found in Subpart EE of the Income Tax Act 2007. Only assets that decline in value over time can be depreciated. The owner must use or have the asset available for use in earning income.

Depreciation and Ownership

You must own the depreciable asset for it to qualify. Finance leases and certain leasehold improvements are treated as owned by the lessee.

Adjusted Tax Value (ATV)

ATV = Cost − Total depreciation claimed. If you choose not to depreciate an asset, you must still track its ATV.

Depreciation and Low-Value Assets

Assets costing under $1,000 can be immediately expensed. Assets under $5,000 may be grouped (pooled) for simpler calculations. No depreciation is claimed in the year of sale.

Losses on Sale

Generally deductible unless the asset is a building (post-2010 buildings usually have 0% depreciation rate).

Depreciation Requirement (EE 1(2))

To claim depreciation, you must own the asset and it must be used or available for use in deriving income.

Depreciable Property (EE6-EE8)

Depreciable property is tangible property or certain intangible assets (Schedule 14) that normally lose value while used to earn income or operate a business.

Items Excluded from Depreciation (EE7)

No depreciation is allowed on: land, trading stock, livestock, financial assets, property compensated for loss, property you choose not to depreciate, low-value items under $1,000, and property already deducted elsewhere.

Depreciation Methods

Diminishing Value (DV) method gives higher early deductions. Straight Line (SL) method gives equal deductions each year. Pooling method allows grouping of assets using lowest rate in pool.

Depreciation Rate Rules

Depreciation rates are set by the Commissioner of Inland Revenue (CIR) based on asset life and residual value. Rates are found in IRD schedules (EE 26-EE 36).

Depreciation Formula (EE 16)

Annual Depreciation = Annual Rate × Value (Cost or Opening ATV) × (Months Used ÷ 12). DV uses opening ATV; SL uses cost.

Depreciation Rate Choices

Taxpayers can choose between DV, SL, or pooling. You can switch between DV and SL, but only for future years.

Fixed Depreciation Rates (EE 29)

Certain assets have fixed rates: Cars (30% DV or 21% SL); Domestic aircraft (10% DV or 7% SL); International aircraft (15% DV or 10% SL).

Pooling Depreciation (EE 21)

Allows multiple assets to be depreciated together using the lowest DV rate among them. Simplifies accounting and reduces admin costs.

Pooling Formula

Depreciation = Rate × (Start ATV + End ATV) ÷ 2 × (Months ÷ 12). Add new assets to increase ATV; remove sold assets to reduce ATV.

Pooling Income Adjustments

If the pool's ATV goes below zero after selling assets, the excess is treated as taxable income.

Building Depreciation

Since May 2010, most buildings with an estimated life over 50 years have a 0% depreciation rate. Shorter-life or special-use buildings (barns, wharves, cool stores) remain depreciable.

Buildings: Special Treatment

Building components (lifts, air conditioning, heating systems) can be depreciated separately at standard rates. Building losses on sale are not deductible.

Land and Buildings

Land is not depreciable. When purchased with buildings, the price must be apportioned between land (non-depreciable) and building (depreciable if eligible).

Low-Value Asset Deduction (EE 38)

Assets costing less than $1,000 may be deducted in full immediately. If multiple low-value items are purchased together from the same supplier, costs are combined (anti-avoidance rule).

Intangible Assets

Only intangible assets with a finite, measurable life (e.g., software licenses, patents) can be depreciated using the straight-line method. Goodwill cannot be depreciated as it lacks a fixed lifespan.

Example - Low-Value Asset

A business buys a $950 printer - fully deductible. Five $300 chairs bought together ($1,500 total) - must be depreciated, not expensed.

Example - Depreciation Method

Company buys a car for $40,000. DV at 30% = $12,000 first-year depreciation. SL at 21% = $8,400. DV gives faster tax relief.

Example - Simple Depreciation

ABC Ltd buys a machine for $50,000 on 15 July. IRD rate = 20% DV. Depreciation = 20% × $50,000 × (9/12) = $7,500 for the year.

Example - Pool Depreciation

Pool includes a computer (50%) and office furniture (20%). Pool rate = 20%. Start ATV $5,000; End ATV $7,000. Depreciation = 20% × (5,000 + 7,000)/2 × 12/12 = $1,200.

Investment Boost (Budget 2025)

Temporary rule allowing 20% extra upfront depreciation on new or imported assets. Reduces future deductions since ATV is lowered. Improves short-term cash flow only.

Example - Investment Boost

Asset cost $10,000. DV rate 30%. Year 1: Extra 20% = $2,000 upfront. Normal depreciation = ($10,000 − $2,000) × 30% × 10/12 = $2,000. Total = $4,000. Next year's ATV = $6,000.

Depreciation and Disposal (EE 47-EE 52)

When a depreciable asset is sold or disposed of, gains or losses are adjusted under EE 48. A loss on sale is deductible; a gain up to prior depreciation is taxable; any excess above cost is a non-taxable capital gain.

Deemed Disposal Situations

Occurs when an asset is no longer used for business, is stolen or destroyed, or ownership changes. Market value can be substituted by the CIR if part of a larger sale.

Insurance Proceeds (EE 52)

If insurance exceeds repair cost, the excess reduces ATV. If ATV goes below zero, the excess becomes taxable income.

Associated Persons (EE 43)

If an asset is sold to a related party, the buyer cannot use a higher depreciation rate than the seller could. Prevents double deductions.

Recovery of Lost or Stolen Property (EE 51)

If property is later recovered, the taxpayer must treat it as reacquired and reverse prior deductions.