What are capital allowances?

When you buy a ute, a commercial oven or a computer for the business, you cannot usually deduct the whole cost in the year you pay for it. Instead, the capital allowance rules let you deduct its decline in value over its effective life. The ATO publishes effective life tables for common assets, or you can self-assess an effective life if you have reasonable grounds and document them. The deduction is worked out on the asset's cost and pro-rated for the days you held the asset during the year.

Repairs are different. Work that restores an asset to its original condition is usually deductible immediately, while spending that creates or improves an asset is capital expenditure and comes under the capital allowance or capital works rules.

You can claim if you hold a depreciating asset and use it to produce assessable income: sole traders, partnerships, companies, trusts that hold income-producing assets, and property investors who own plant and equipment in a rental property. Assets used solely for private purposes, or hobby assets, do not qualify, and mixed-use assets such as a vehicle are apportioned using a logbook.

Plant and equipment (machinery, business vehicles, computers, office furniture, commercial kitchen equipment) is claimed as decline in value. Structural building costs, renovations and extensions are capital works, claimed on a statutory basis over long periods. Low-cost and low-value assets may be immediately deductible or pooled under the simplified depreciation rules, subject to the current thresholds. Second-hand depreciating assets generally qualify, though write-off concessions can carry extra conditions. Established residential rentals are the exception: an investor who buys a previously used home cannot claim decline in value on the second-hand plant and equipment that comes with it, only on capital works and assets the investor buys and installs.

When you sell or stop using an asset, a balancing adjustment applies on disposal: compare the termination value (sale proceeds) with the adjustable value (the written-down value for tax). If proceeds are higher, the difference is assessable income; if lower, you get an extra deduction. Report it in the year of disposal and keep the sale documents.

The ATO expects records that substantiate every claim: tax invoices and contracts, finance agreements, the date the asset was first used or ready for use, a depreciation schedule showing method, effective life and annual deductions, vehicle logbooks, and disposal paperwork. Keep them for at least five years from lodging the return.Who claims follows the structure: under a chattel mortgage or hire purchase you hold the asset and claim its decline in value, while under a finance or operating lease the financier claims it and you deduct the lease payments.