Tax Facts - Capital Allowances
The Uniform Capital Allowance (UCA) system provides a set of general rules that apply across a variety of depreciating assets and certain other expenditure. Simplified rules may apply in the case of small businesses.
The UCA system provides a mechanism that taxpayers can use to deduct certain capital expenditure over time, including expenditure on the acquisition of capital assets.
The effective life of a depreciating asset is limited and its value can reasonably be expected to decrease in value over its useful life. Land trading stock and most intangible assets (excluding exceptions such as intellectual property and in-house software) are not depreciating assets.
There are two options for calculating the decline in the value of an asset under the UCA system:
- Prime cost method – Decline is calculated as a % of the initial cost of the asset
- Diminishing value method – Decline for each income year is calculated on the balance of the asset's cost that remains after the decline in value for previous income years has been considered
MORE: Access the Decline in value calculator.
The ATO allows recalculation of the effective life of an asset if the circumstances of use change and the effective life initially chosen is no longer accurate. An improvement to an asset that increases its cost by 10% or more in a year may result in an obligation to recalculate the effective life of the asset. The decline in value of certain depreciating assets with a cost or opening adjustable value of less than $1000 can be calculated through a low-value pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.
MORE: For more information see the Capital Allowances section of the ATO website.