How to Do Depreciation: A 2026 Guide for Australian Small Business

Most articles about depreciation start with formulas. For a small business in 2026 the formulas are usually the last thing you need, because the first question settles it: did the asset cost less than $20,000?

If it did, and your aggregated turnover is under $10 million, you deduct the whole thing this year and there is nothing to calculate. That rule stopped being temporary on 1 July 2026. It is now permanent law, and it changes how the rest of this works.

What Depreciation Actually Is

When you buy something that will earn income for years, the cost belongs to those years, not just to the month you paid for it. Depreciation is the mechanism that spreads it.

It is the same idea as the matching principle in accrual accounting: put the cost in the period it helped earn revenue. A $9,000 machine that runs for six years is not a $9,000 expense in March. It is roughly $1,500 a year of the machine wearing out while it makes you money.

The ATO calls these depreciating assets, and the deduction the decline in value. What counts is the asset having a limited effective life and reasonably being expected to decline in value over that life. Tools, vehicles, computers, plant, furniture, fit-out. Land does not depreciate. Trading stock does not depreciate, it is dealt with separately.

The part that trips people up is that Australia has two parallel systems, and small businesses can choose the simpler one.

The $20,000 Write-Off Is Now Permanent

The instant asset write-off lets an eligible small business deduct the full cost of an asset in the year it is first used or installed ready for use, instead of depreciating it over years.

For most of the past decade the threshold moved constantly, and it was legislated one year at a time, often late. Businesses were making purchase decisions in May without knowing what the rule for that year would be. That is over. From 1 July 2026 the $20,000 threshold is permanent, with no sunset date and no annual renewal.

The practical change is not the number, which has been $20,000 for several years now. It is that you can plan against it. A tool purchase in March no longer depends on whether a bill passes before June.

The conditions are worth getting exactly right.

• Aggregated turnover under $10 million. Aggregated means your turnover plus that of connected entities and affiliates, not just the one entity buying the asset.
• Under $20,000 per asset. The threshold applies asset by asset, so three separate $15,000 assets are three separate full deductions. It is not an annual cap.
• GST exclusive if you are registered for GST. A $21,500 asset including GST costs $19,545 excluding it, and qualifies. If you are not registered, use the GST inclusive price.
• First used or installed ready for use in the income year. Ordering and paying in June does not create the deduction if the machine is still in its crate on 30 June and not ready to run.
• New or second-hand. Both are eligible.
• Business-use portion only. An asset used 70% for business gives a deduction for 70% of the cost. The $20,000 test applies to the whole cost, not to your share of it.

Above $20,000: The Pool

An asset costing $20,000 or more does not get written off, and it does not get its own depreciation schedule either. Under the simplified rules it goes into a single general small business pool with everything else above the threshold.

• First year: 15% of the cost. Not pro-rated. An asset added on 20 June gets the same 15% as one added on 2 July.
• Every year after: 30% of the pool's opening balance. One calculation for the whole pool, not one per asset.
• If the pool balance falls below $20,000 at year end, write off the lot. Before applying the 30%, check the balance. A pool sitting at $17,400 on 30 June is deducted in full and starts the next year at zero.

That last rule is the one worth diarising. It is a real deduction that gets missed because nobody looks at the pool balance until after the depreciation has already been calculated.

Simplified depreciation is a choice, not an obligation. You can opt out, and the rule that used to lock you out for five years afterwards is suspended until 30 June 2027. If you opt back in, the opening pool balance has to be rebuilt to include assets acquired while you were out, which is fiddly enough to be worth doing with your accountant rather than alone.

When the Simplified Rules Do Not Apply

If your aggregated turnover is $10 million or more, or you have chosen out of simplified depreciation, you are on the general capital allowance rules and every asset gets its own calculation over its own effective life.

Effective life is not a guess. You can use the Commissioner's determination, currently the Income Tax (Effective Life of Depreciating Assets) Determination 2025, which replaced the older taxation ruling from 31 October 2025. It runs to thousands of asset categories. A desktop computer is four years. A laptop is two. Most workshop plant sits somewhere between five and fifteen.

You can also self-assess an effective life if you have a defensible basis for it, which matters for assets used unusually hard or in a way the standard life does not reflect. Self-assessing to get a bigger deduction without evidence is not a strategy, it is an audit finding.

Prime Cost vs Diminishing Value

Once you have an effective life, you choose a method, asset by asset, at the point you first use it. You cannot switch later for that asset.

Base value means the cost less the depreciation already claimed, so the amount the 200% rate applies to gets smaller every year. The 200% rate applies to assets acquired from 10 May 2006. Older assets use 150%.

Take a $30,000 machine with a ten-year effective life, first used on 1 July.

• Prime cost: $3,000 every year for ten years.
• Diminishing value: $6,000 in year one, then $4,800, then $3,840, then $3,072, tapering from there.

Over the full life both methods deduct close to the same total. The difference is timing, and timing is worth something when you have just spent $30,000. Diminishing value gives you $14,640 of deduction across the first three years against prime cost's $9,000.

Two things temper that. A larger deduction in a low-income year can be worth less than a smaller one in a high-income year. And the days-held fraction applies in year one, so an asset first used in April gets about a quarter of the annual amount, not the whole thing.

What "Cost" Actually Means

Cost is not the number on the invoice. It is what you spent getting the asset into a position and condition to be used.

• Include delivery, freight, installation, commissioning, and the cost of getting it running.
• Include later improvements as a second element of cost. A $4,000 upgrade to an existing machine is treated as a separate amount, and under the simplified rules an improvement under $20,000 can itself be written off immediately.
• Exclude repairs and maintenance, which are ordinary deductions in the year you incur them rather than capital.
• Exclude GST you can claim back as a credit.

A $19,200 machine plus $900 freight and $400 installation is a $20,500 asset. It misses the instant write-off and goes into the pool. That is a $20,500 decision made by a $1,300 invoice most people file separately, which is exactly why the freight docket matters.

Cars Have Their Own Limit

Cars are the asset people most often get wrong, because two separate caps apply and neither is obvious.

First, the instant asset write-off. A car costing $20,000 or more does not qualify, and most work vehicles cost more than that. It goes into the pool or onto a depreciation schedule like anything else.

Second, the car limit. For the 2026-27 income year it is $69,883. If you buy a car for more than that, depreciation is calculated on $69,883 and the excess is simply never deductible. The GST credit is capped to match, at one eleventh of the limit, which is $6,353.

The limit applies to cars, meaning vehicles designed to carry a load of less than one tonne and fewer than nine passengers. A one tonne ute or a van above that threshold is not a car for this purpose and is not subject to the limit, which is a meaningful difference when you are choosing between two vehicles.

Then apply business use. Depreciation on a vehicle is deductible only to the extent you use it for business, and the way you prove that percentage is a logbook. Our guide to the logbook method covers what a valid one has to contain and how long it lasts. Our notes for Melbourne tradies cover the vehicle and tool claims that come up most often.

When You Sell It

This is the part that surprises people, usually two years after the deduction they enjoyed.

When you deduct an asset in full, its tax value becomes zero. If you later sell it, trade it in, or receive an insurance payout for it, the business portion of what you receive comes back. Under the simplified rules it is subtracted from the pool balance, and if that pushes the pool below zero the shortfall is included in your assessable income. Outside the pool it is a balancing adjustment against the asset's written-down value.

A tradie who writes off a $16,000 trailer and sells it three years later for $9,000 has $9,000 coming back into the numbers, not a tax-free $9,000. The deduction was brought forward, not created from nothing.

None of this makes the write-off a bad deal. It just means the cash from selling old equipment is not as free as it looks, and it is worth knowing before you spend it.

Frequently Asked Questions

Can I depreciate based on hours used or kilometres driven?

Not for Australian tax. You will see the units of production method in accounting textbooks, and it is a legitimate method for internal management reporting, but the ATO's capital allowance rules give you prime cost or diminishing value and nothing else.

Does the $20,000 threshold include GST?

If you are registered for GST, use the GST exclusive cost. If you are not registered, the GST is part of your cost and counts towards the threshold.

What if the asset is used partly for private purposes?

The deduction is apportioned to the business-use percentage. You still test the threshold against the full cost. A $19,000 asset used 60% for business is eligible for the write-off, and the deduction is $11,400.

I bought it in June and it arrived in July. Which year?

The year it was first used or installed ready for use, which is July. Payment date does not decide it, and neither does the invoice date.

What if my turnover goes above $10 million?

You lose access to simplified depreciation and the instant asset write-off from that year and move onto the general rules. Existing pool balances are dealt with under transitional rules, and it is worth planning for before it happens rather than after.

Are buildings depreciable?

Not as depreciating assets. The structure of a building is dealt with under capital works, at a different rate and over a much longer period. The fit-out and plant inside it are usually depreciating assets, which is why a proper split between the two is worth getting right on any significant fit-out.

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Depreciation is mostly a question of which of three buckets an asset falls into: under $20,000 and written off now, $20,000 or more and pooled, or outside the simplified rules and on its own schedule. Get the bucket right and the arithmetic looks after itself.

Trew North Accounting sets up asset registers and depreciation schedules for Melbourne businesses, and reviews them before purchases rather than after. See our accounting and tax planning and small business accounting services, or get in touch.

This article is general information, not advice for your circumstances. Thresholds and rules change. Check current requirements with the ATO or with us before you lodge.