Car Depreciation: a Simple Guide

Business vehicle depreciation is a topic that new small business owners may be unfamiliar with, and calculating it can be challenging. However, understanding this deduction is crucial since it can result in significant tax savings.

Admittedly, car depreciation can be a complicated subject. But, to ensure you’re getting the most out of your car’s value, it’s essential to understand what car depreciation is and how it can lead to a higher tax write-off.

To make this task as easy as possible, we’ve included a car depreciation calculator for Australian business owners. But first, let’s look at what vehicle depreciation is. Then, we’ll drive on over to the good stuff, like how to use the calculator.

What is business vehicle depreciation?

As a small business owner, there’s a chance you have a vehicle you use for work. Your car ownership status can be used to help you get a better tax return overall. But, it’s not as simple as writing the car’s value on a deduction form.

A business car declines in value over time thanks to wear and tear.

Car depreciation, or decline in value, is the cost of the car spread over its effective life. Any business owner who uses a vehicle as part of their commercial operation is entitled to claim back the cost as a tax deduction when tax time arrives.

But, vehicle depreciation isn’t the same as other forms of depreciation. Work-related travel expenses can vary depending on how much you drive the car for your business operations. To account for this, car yearly depreciation is partially governed by the number of miles put on the vehicle during work hours.

Again, that’s for work hours only. If you use the car for both work and personal matters, you need to track your miles and only deduct the miles you drove for work purposes.

What causes car depreciation?

Factors determining depreciation of certain cars include the following: 

• Mileage: A car's value tends to decrease as its mileage increases.
• Age: The value of a car decreases with its age, which is determined by its physical appearance and mileage.
• Perceived value: Older cars are often deemed less desirable on the market due to their perceived lower value.
• Fuel efficiency: A fuel-efficient car can provide cost savings and higher resale value in the long run.
• Condition: Damage to your car's exterior or interior can decrease its value, making it challenging to sell it at a fair price.

How do you claim car depreciation?

Depending on your eligibility, you can choose to claim business vehicle depreciation using either general depreciation or simplified depreciation rules. Some points to consider when making a depreciation claim include:

• The cost or original value of the car: Depending on the value of the car, you may immediately rule out some depreciation methods (such as the instant asset write-off for vehicles, which has a price cap).
• The depreciation rule, or method of depreciation chosen: You can expense or write off a vehicle all at once, depending on the purchase price. Keep in mind that not all methods are available for all price points. If the vehicle is too expensive to write off immediately, you’ll have to choose a depreciation method.
• The effective life of the vehicle: A brand-new car is estimated to have a useful life of eight years. For used vehicles, this number can vary.
• The luxury car threshold: If you purchase a vehicle that costs more than the current luxury car threshold, you will be subject to a luxury car tax. 

Once you’ve considered the above criteria, you can determine which depreciation route is best for you and your vehicle.

Write-off a car for business

The ATO enforces a maximum claim limit known as the car limit when purchasing a car for business tax deductions. For the 2023/24 fiscal year, this limit has been raised to $68,108.

Simplified car depreciation

Simplified depreciation is only available to businesses that have an annual turnover of less than $2 million. How this rule applies to your business vehicle’s depreciation will depend on the cost of your vehicle.

Vehicles under $30,000 can fall into instant asset write-off territory, while vehicles over $30,000 may be candidates for depreciation instead of an instant write-off.

Instant asset write-off for vehicles under $30,000

If your motor vehicle cost less than $30,000 – the current instant asset write-off threshold – you can immediately claim the full value back as a tax deduction in the same year you purchased it. 

You still have the option to depreciate the vehicle instead, but an instant write-off is ideal, as it allows you to get more money back immediately, rather than having to wait.

For example, John – a business owner operating a small driver-training academy –purchased a Toyota for $19,999. He was able to claim back the full amount, reducing his taxable income by $19,999.

But, some vehicles will fall out of the instant asset write-off threshold. This is where you need to assess alternatives.

Pooled assets for vehicles over $30,000

If you buy a vehicle that falls outside the instant asset write-off threshold, you can still deduct it, but accelerated depreciation rules won’t apply. Under simplified depreciation rules, you will “pool” an expensive vehicle into a small business asset pool and claim:

• A 15% deduction in the year you bought it
• A 30% deduction each year after the first year

Alternatively, you can use the ATO’s general depreciation rules to work out how much you can claim for vehicles over the threshold.

General depreciation

General depreciation rules calculate depreciation amounts you can claim based on the life of the asset and the method of calculation. Under this rule, you can claim deductions on your business vehicle using one of two methods:

• Prime cost (or straight line depreciation): This method assumes the vehicle’s value declines uniformly. That is, depreciating by equal amounts each year.
• Diminishing value: This method assumes that the vehicle’s value drops sharply in its early years, resulting in higher deductions soon after purchase that eventually taper off. This method can be beneficial for expensive vehicles, as the value of the car will quickly drop. Using straight-line depreciation you’d lose out on greater deductions in the later years, while diminishing value would let you capitalise on the vehicle’s higher cost early on before it degrades.

Be sure to read additional tax depreciation guides to ensure you completely understand general depreciation rules and how they apply to vehicle depreciation. It's a complex subject with many nuances that are easy to miss.

In general, think about the kind of vehicle you’re buying when considering either of the above methods. A used Kia that costs you $25,000 is going to be a better option for an instant write-off or the straight-line depreciation method, as the value of the car won’t drop too drastically compared to what you paid.

A new Subaru that sets you back $50,000 would be a better fit for diminishing value. This is because the car will rapidly decline in value in the first few years.

Using the diminishing value method will allow you to claim a larger deduction based on the vehicle’s current value before it tapers off in later years. Straight-line depreciation would only allow for a smaller, uniform deduction, that could see you losing out on thousands in deductions.

A business vehicle’s effective life

General depreciation rules require a determination of the effective life of a vehicle in order to calculate either prime cost or diminishing value methods. To work this out, you can use one of the following:

• ATO determination: A standardised rate set by the ATO and published annually in taxation rulings
• Self-assessed determination: A self-assessed estimate based on the features of the vehicle and the way it’s used

How you work this out will depend on your business type. For example, if you use your work vehicle to drive Uber customers around 60 hours a week, its useful life is probably closer to four years.

In this scenario, you’d be better off performing a self-assessment over the standard eight-year effective life determination set out by the ATO. This is especially true if you bought a costly new vehicle.

The luxury car limit

Before you rush out to buy a new car, particularly one over the current write-off threshold, be aware of the ceiling value applied to higher-value vehicles. For example, if the luxury car limit is set at $57,581 for the financial year and you buy a Ferrari F12 for a cool $1 million for the daily drive to the post office, you’ll only be able to claim around one-twentieth of its cost against your taxable income.

This doesn’t include the luxury car tax that you’ll also have to pay, whether the car is for personal or business use. That Ferrari isn’t looking so cool now, is it? (Okay, they’re still cool.)

A free car depreciation calculator

Determining car depreciation can be tricky, there’s no doubt about it. Fortunately, there are free calculators that can take a lot of the work out of it. While a calculator is no substitute for going to a tax specialist, it’s a great way to get an idea of which depreciation method is best for you.

Use this free car depreciation calculator to get an idea of how much your car could be valued at, and how much it will likely depreciate over the years. Again, this isn’t a replacement for going to a financial consultant or tax advisor, but it’s a good start toward understanding which avenue might be best for you.

Driving toward success

While taking your accountant’s advice is always the best route, it’s important you understand how business vehicle depreciation works before going into the discussion. If you’re keen to maximise your asset deductions this financial year, it’s worth investigating whether simplified or general depreciation rules apply to you.

There are a number of tax deductions you can take, and your work vehicle is a big one. Now, get your business out of the park and put the pedal to the metal.

Accounting software can help small business owners manage and calculate depreciation for their assets. QuickBooks accounting software can automate the process of tracking the value of assets over time and applying the appropriate depreciation method. It can also generate depreciation schedules and reports that can be used for financial statements, tax filings, and other business purposes. With accounting software, small business owners can save time and avoid manual errors while ensuring that their depreciation calculations are accurate and compliant with accounting standards.