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Tax Facts - Capital Allowances

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The Uniform Capital Allowance (UCA) system provides a set of general rules that applies across a variety of depreciating assets and certain other expenditure. They provide a mechanism by which taxpayers can deduct over time certain capital expenditure, including expenditure on the acquisition of capital assets.

During 2001 the UCA rules replaced a range of former capital allowance provisions, including those relating to plant and equipment.

A depreciating asset is one that’s effective life is limited, and can reasonably be expected to decrease in value over its useful life. However, the following are not depreciating assets:

  • Land;
  • Trading stock;
  • Most intangible assets (unless it is one of the exceptions such as intellectual property and in-house software).

Under the UCA system there are two options for calculating the decline in the value of an asset:

  • Prime cost method – the decline is calculated as a percentage of the initial cost of the asset;
  • Diminishing value method – the 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 taken into account.

The ATO allows recalculation of the effective life of an asset if the circumstances of use change and the effective life initially chosen may no longer be accurate. An improvement to an asset that increases its cost by 10 percent 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 worked out at an annual diminishing value rate of 37.5 per cent.

For more information please see the Guide to depreciating assets 2005-2006 and the Capital Allowances homepage on the ATO website.


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