Business Guide — Maturing
A guide to business vehicle depreciationT11T12
Car depreciation can be a complicated subject to get your head around. But for business owners, it can be key to making smarter financial decisions.
5 MINS READThere’s a general saying that a vehicle starts to lose value the moment it leaves a dealership. That’s depreciation in action in a general economic sense. And while you can’t avoid it, the income tax system recognises the decline in value concept, through a tax depreciation regime which you can use to your advantage at tax time, if you know how it works. We’ll break down what tax depreciation is, explain instant asset write-off and show you how it could help lower your taxable income. Let’s get started.
This discussion is high level and does not cover every facet of tax depreciation. As such, we recommend you consult with your own independent taxation adviser (registered tax agent) in relation to your business’s own facts and circumstances.
Tax depreciation is available for businesses that ‘hold’ or own or are deemed to own the vehicle – usually a business leasing a vehicle is not entitled to tax depreciation.
Under income tax rules, only owners or deemed economic owners of vehicles can claim tax depreciation.
This means the business can claim tax depreciation on assets:
- Owned and self-funded
- Owned and funded by chattel mortgage loan or other loan
- Assets held under term purchase (hire purchase) where the term purchase business customer is deemed to be a quasi-owner
- Income tax luxury cars under finance lease / novated financed lease or operating lease / novated operating lease
Business cannot claim tax depreciation on:
- Non-luxury vehicles held as a lessee under finance lease / novated finance lease
- Non-luxury vehicles held as a lessee under operating lease / novated operating lease
Usually, a business will claim deductions for the lease rentals (and not tax depreciation and not interest) for a lease of a non-luxury vehicle and the leasing company will claim tax depreciation on the non-luxury asset.
What is depreciation and what influences it?
Simply put, the general concept of economic (or financial accounting) car depreciation is how much value a vehicle loses over time, and for businesses, that matters.
Income tax law permits business decline-in-value tax depreciation deductions each year under income tax depreciation rates and methods. From diminishing value tax depreciation to instant asset tax write-off, there are lots of different options ahead of you and your business, which we’ll discuss later on in this article. But first, we’ll take a closer look at some of the biggest factors that can determine your vehicle’s general (non-tax) economic depreciation over time. These could affect not only your resale value, but also income tax profit (loss) on disposal.
Make and model
Buying a vehicle from a trusted brand with an excellent reputation often means your vehicle holds its value better. Toyota and Lexus models are known for their reliability and are generally in high demand, which increases their market value and slows down their rate of economic depreciation (but not tax depreciation albeit for implications in the fiscal year of vehicle disposal).
Vehicle maintenance
The better you maintain your vehicle, the slower it economically depreciates. So, it's important to regularly service your vehicle and maintain its appearance. A Toyota Genuine Service will ensure your vehicle or vehicles receive dedicated care and attention from Toyota-trained technicians. You may also be eligible for Capped Price ServicingTS4 and the Toyota Warranty AdvantageT4.
A well-kept logbook is also a great way of showing potential buyers that your vehicle has been properly looked after.
Interior and exterior condition
It might sound simple, but keeping a clean and tidy vehicle can go a long way. Well-maintained vehicles are almost always more attractive to potential buyers.
Accessories
Sometimes adding accessories, particularly Toyota Genuine AccessoriesP4, can improve your vehicle's value. Toyota Genuine Accessories are designed to integrate seamlessly with your Toyota vehicle and must meet Toyota's stringent quality standards. So, with Toyota Genuine Accessories installed on or within your Toyota vehicle, you could be able to re-sell your vehicle at a higher price when it reaches the end of its life cycle.
Your vehicle's age
In most cases, the older a vehicle is and the more kilometres it's done, the more it economically depreciates. Physical appearance can also affect its value, especially if it hasn't been serviced regularly.
Fuel efficiency
Fuel-efficient cars, utes, vans and other vehicles are generally cost-effective to run and tend to have better long-term resale value. With this in mind, Toyota's Hybrid Electric range is often considered a smart, long-term business investment.
Market demand
Much like the brand you choose, the vehicle model and style will also affect resale value, so consider the potential for future market demand for your vehicle before you buy. Buying a vehicle that is in high demand when you choose to sell could enable you to re-sell your vehicle for a higher price.
Looking for a vehicle that holds its value? The Toyota range is built with businesses like yours in mind.
How to calculate a tax deduction for your business vehicle
One big benefit of claiming vehicle tax deductions as a business owner is it’ll reduce your taxable income – meaning you’ll pay less tax each year. There are a few ways you can calculate vehicle depreciation for tax purposes, depending on your business’ annual turnover and the value of the vehicle you’re buying. Let’s take a look at the options ahead of you so you can get the most value out of your vehicle.
Claiming a tax deduction for vehicle depreciation for small businesses
A $10 million aggregated annual turnover test applies to determine whether a business entity may apply the small business tax depreciation rules. In measuring aggregated turnover, the annual turnovers of the business entity and affiliated or connected entities of the business (broadly associate entities) are combined to test if the $10 million threshold has been breached. If your business’ aggregated annual turnover is under the $10 million threshold, great news – you can choose to use the ATO's simplified small business tax depreciation rules. In this case, you have two options ahead of you.
A small business may also choose not to adopt the concessionary treatment under the small business tax depreciation and apply the general tax depreciation rules.
Option 1. Instant asset write-off
An instant asset write-off lets you claim the cost of an asset as an immediate deduction, rather than writing it off bit by bit each year (however, sole traders will need to consider private-use adjustments). For your vehicle to be eligible for the instant asset write-off option, your purchase price will need to be below the ATO's defined threshold (for the 2024-25 and 2025-26 financial years, this threshold is $20,000). As new vehicles almost always exceed the threshold, it's really only a suitable option to the extent your business purchases used vehicles under the $20,000 threshold.
Keep in mind that to qualify, your used vehicle generally needs to be first used or installed ready to be used within the financial year you are claiming instant asset write-off. You'll need to ensure that you have the right records and invoices to support your claim.
If you want to free up your cash flow, without waiting years to feel the benefit, this can be a smart option. Please refer to the link below for details.
Instant asset write-off for eligible businesses | ATO
Keep an eye on Toyota's Used Vehicles marketplace if this is something that you're considering for your business.
Option 2. Small business pooled assets
If the cost of an asset exceeds the relevant instant asset write-off threshold, then you must place the asset into the small business pool. From there, you can claim a set percentage each year. A small business depreciation pool is a way for eligible small businesses to group together (or "pool") their eligible depreciating assets and claim simplified depreciation deductions on the whole pool - which saves time and boosts deductions earlier on. Please refer to the link below for more details.
At a high level, in the fiscal year the vehicle is added to the pool a 15% tax depreciation rate applies (not daily tax depreciation) and in future years that the asset is held, an effective 30% diminishing value rate applies.
Therefore acquisition and first use of business vehicles owned in the latter months of the fiscal year (e.g. in the last month of the fiscal year) can result in modest tax depreciation timing benefits compared with non-pool general daily tax depreciation.
Small business pool calculations | Australian Taxation Office
Considerations for sole traders and partnerships
Sole trader car depreciation works a little differently than if you're claiming as a company or trust. If you're using the same vehicle for both your business and for personal use, you'll need to keep a logbook that shows what percentage of your use is related to your work.
The logbook method also applies for partnerships so each partner will need to keep a record. That's because you may need to split deductions depending on how much each partner uses the vehicle for business. Toyota Halo, Toyota's genuine fleet management software, has a logbooking feature that improves the speed and accuracy of your logbook process with automated data entry and flexible export functionality.
Private-use tax depreciation adjustments will need to be made for sole traders and partners in partnerships.
Claiming a tax deduction for vehicle depreciation for larger businesses and higher-value vehicles
If your business is not eligible for small business tax depreciation or is a small business and chooses not to apply the small business concessional tax depreciation rules, you'll need to use general depreciation rules for your tax claim. Here, you have two options ahead of you.
Option 1. Diminishing value (DV) tax depreciation
This method means you claim more of your vehicle's cost in the early years of owning it. It's based on the idea that a car loses more value when it's newer. As your vehicle's value decreases each year under DV, so does the deduction amount. If managing cash flow is a priority for you, this method can be useful, as you'll be able to claim bigger tax depreciation claims in the early years of ownership.
Option 2. Prime cost (PC) tax depreciation
With this method, you'll spread out the deduction evenly over the business ownership of the vehicle. Lower tax depreciation deductions in the earlier years of asset ownership (and higher in later years) are taken compared with the diminishing value method. It can be a good call if you're after consistent, predictable deductions, especially if you're planning to keep the vehicle for a longer time.
What do these car depreciation methods have in common?
The ATO requires a few key details to work out your claim. You'll use these same elements for your car tax depreciation calculation, whatever method you go with:
- The cost or purchase price of your vehicle.
- The date of purchasing the vehicle (or first using it for business purposes) as tax depreciation is calculated on a daily basis.
- Application of ATO tax depreciation rates (which are in turn determined by ATO set effective lives or ATO statutory capped effective lives). It is possible for a business to self-assess effective life to apply a tax depreciation rate different to the ATO tax depreciation rate, given business facts and circumstances, but usually the challenges in self-assessing effective life mean most businesses apply ATO tax depreciation rates.
- How much it's used for business purposes – this is where a logbook comes in handy.
- For sole traders and partners in a partnership, how much it's used for business purposes – this is where a logbook comes in.
Common vehicle categories and their ATO tax depreciation rates are:
| ATO Vehicle Category | ATO Effective life / or ATO statutory capped effective life in years | ATO Diminishing Value DV Tax Depreciation Rate | ATO Prime Cost PC Tax Depreciation Rate |
| Cars (motor vehicles designed to carry a total goods and occupants load of less than one tonne and fewer than 9 occupants) | 8 | 25% | 12.5% |
| Light commercial vehicles (designed to carry a load of one tonne or greater and having a gross vehicle mass of 3.5 tonnes or less) | 7.5 (stat cap) | 26.67% | 13.33% |
| Trucks (having a gross vehicle mass greater than 3.5 tonnes) | 7.5 (stat cap) | 26.67% | 13.33% |
| Forklifts | 11 | 18.18% | 9.09% |
Luxury cars depreciation limits
Keep in mind there's a car tax depreciation limit set by the ATO for luxury cars. The tax depreciation limit applies if:
- the vehicle is an income tax "car" (designed seating capacity not exceeding 8 and less than 1 tonne total passenger and goods carrying capacity); and
- the vehicle is principally designed to carry passengers rather than goods; and
- the vehicle purchase price or capital cost of the vehicle at time of acquisition exceeds the prevailing tax depreciation cost limit.
That means even if your vehicle costs more than the annual car cost limit ($69,674 for the 2024-25 and 2025-26 financial years), you can only claim depreciation from the capped amount (the purchase price element above the limit for a luxury car cannot be tax depreciated). Special adjustments also need to be made for tax profit (loss) calculations in the fiscal year of disposal.
Considerations for companies and trusts
When it comes to company vehicle depreciation or if you run a trust, your vehicle is generally considered to be a business asset. However, if you use it for personal trips and or the vehicle is available for the private use of an employee or used privately by an employee, you could trigger Fringe Benefits Tax. Please speak to your financial advisor or accountant for further information on fringe benefits tax implications.
Ready for the next move? Explore the Toyota Fleet range or chat to our experts about your business vehicle needs.
Deciding what’s next for your business
Ready to put it all into action? Explore the Toyota range or chat to our experts about your business vehicle needs.
Importance of customers obtaining their own independent financial and taxation advice: This is a high level and general discussion and does not cover all tax matters that may need to be considered and the specific facts and circumstances of a customer. We recommend customers obtain their own independent taxation (from a registered tax agent) and financial advice.
