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Business income tax
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Business income tax

Understanding depreciation

As a business you're generally required to claim depreciation as a deduction in your income tax return, which may reduce your tax to pay.

Depreciation accounts for the reducing value of your business assets over time, due to wear and tear.

For tax purposes, the reducing value of your assets is recognised from when it's first used in business until it's sold or no longer needed.

Depreciation basics

As a business you'll need to make depreciation deductions on your assets each year. Deductions are made on assets that you:

  • own
  • lease (depending on the type of lease), or
  • are buying under a hire purchase agreement.

The amount of your depreciation deduction will vary depending on the:

  • cost of the asset
  • depreciation method, and
  • depreciation rate.

If you're registered for GST you'll need to calculate depreciation on the GST-exclusive cost of the asset. If you're not registered for GST you'll need to calculate your depreciation on the GST-inclusive cost of the asset.

It's important that you keep accurate records of your assets for filing your annual depreciation claims.

Watch our video to find out what you need to know about depreciation

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The video is also available in sign language, Korean and Mandarin in our videos section

What to depreciate

Assets that attract depreciation

Generally, you must claim depreciation deductions on business assets that you keep in your business for longer than a year. However, there are some assets that you don't need to claim depreciation for. These include:

  • land
  • trading stock
  • franchise fees
  • assets that you elect not to depreciate
  • low cost assets (less than $500) that you claim as a full deduction
  • intangible assets like goodwill
  • patents

If an asset is for private use as well as business use, then you can only claim depreciation on the percentage used for business.

Deciding not to depreciate

Claiming depreciation on your business assets is generally compulsory. However, you can decide not to depreciate a particular asset. For more information please read page 6 of the Depreciation - a guide for businesses (IR260).

Once you have decided not to depreciate an asset you can't claim depreciation on it in future years.

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