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Business income tax
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Understanding depreciation

Businesses need to claim depreciation deductions on assets each year to account for the reducing value of business assets over time due to wear and tear.

The reducing value of your assets for tax purposes begins when it's first used, or available to be used, in your business. It continues until it's sold or no longer needed. Depreciation is claimed as a deduction from your income on your tax return.

Depreciation deductions are made on assets you:

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

The amount of your deduction will vary depending on the:

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

If you're registered for GST, work out depreciation on the GST-exclusive asset cost.

If you're not registered for GST, work out depreciation on the GST-inclusive asset cost.

It's important to keep accurate records of your assets. You need these for filing your annual depreciation claims.

What to claim depreciation on

You must claim depreciation on assets you keep in your business for longer than a year. These are known as capital expenses or fixed assets. However there are some assets that you don't depreciate, including:

  • 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.

If an asset is for private and business use you can only claim the percentage used for the business.

Deciding not to depreciate assets

Claiming depreciation on your business assets is generally compulsory. But, you can decide not to depreciate a particular asset.

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

Find out how to elect not to depreciate an asset in Depreciation - a guide for businesses (IR260).

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Video: Introduction to business 4: Depreciation

This video will let you know everything you need to know about depreciation.

Flash | 6:05 minutes

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This video is also available in sign language, Korean and Mandarin.