If you use a car for your business, its value drops over time, and the tax system lets you claim that drop as a tax deduction. That is car depreciation. This guide explains how car depreciation works in Australia for business tax purposes, how quickly a car loses value in the real world, how to calculate car depreciation under the two ATO methods, the car limit, and how depreciation differs from the instant asset write-off.
What is car depreciation?
Depreciation, or decline in value, recognises that a vehicle wears out and loses value as you use it. Instead of claiming the full purchase price in one year, you claim a portion of the car’s value as a tax deduction each year over its effective life.
There are really two kinds of car depreciation, and it pays to keep them separate:
- Market depreciation: the fall in your car’s resale value on the used car market. This is what car buyers usually mean.
- Tax depreciation: the decline in value you claim for business tax purposes under ATO rules. This is what your accountant means, and it is the focus of this guide.
Tax depreciation applies whether you buy new or used. For a used car, you depreciate the amount you paid for it (up to the car limit), based on its remaining effective life.
How quickly does a car lose value?
On the market side, vehicle depreciation is fastest at the start, and typical passenger vehicles can lose up to 58% of value after three years. A brand new car can shed a significant slice of its resale value the moment it leaves the dealership, and the first few years are typically the steepest. From there the curve flattens: an older used car loses value more slowly in dollar terms.
How much a particular car loses depends on:
- Make and model: the car’s model and different car makes can produce very different car depreciation rates, and well-known brands often retain more value; in Australia, SUVs also tend to depreciate more slowly than sedans;
- Kilometres travelled: higher odometer readings mean lower resale value, so keeping mileage low and below 15,000 km per year can help maintain resale value;
- Condition and service history: condition, maintenance history, and accident history all influence resale value, and strong records usually support lower depreciation rates;
- Fuel type and demand: fuel efficiency, demand, and buyer preferences can change residual value quickly, while luxury vehicles often fall faster because of higher running costs and smaller buyer pools.
For example, the Toyota Corolla Ascent Sport Hybrid is often cited as depreciating by only 9.45% initially.
None of that changes your tax claim directly: the ATO methods below run off your purchase price, not the resale value. But it matters when you sell or trade in, because car ownership costs also turn on resale outcomes and the difference between the written-down value and the sale price is brought to account in your tax return.
Who can claim car depreciation?
You can generally claim depreciation on a car used to produce assessable income, for example, as part of the broader rules on business tax deductions for Australian businesses and how tax deductions work for different types of expenses:
- sole traders and businesses that own a vehicle used for business purposes, where sole trader vehicle and other tax deductions are often a major part of the annual claim;
- employees who use their own car for work and use the logbook method to claim car expenses, whereas the cents per kilometre method already includes depreciation so separate depreciation is generally not claimed under that kilometre method.
You can only claim the business-use portion, not any private use. If the car is used 70% for business purposes and 30% privately, you can only depreciate 70% of its value under the cents per kilometre rules. A logbook is the standard way to establish that percentage.
The two depreciation methods
The ATO lets you choose between two methods to calculate depreciation, and once you pick one for an asset you generally stick with it.
1. Diminishing value method
This method claims more in the early years and less later on, which mirrors how a car actually loses value. It applies a fixed rate to the car’s remaining (written-down) value each year, starting from the car’s base purchase price as the base value for the first calculation; the method assumes a larger fall in value in the earlier years, so each year’s deduction runs on the remaining base. For a car with an eight-year effective life, the diminishing value rate is 25% of the written-down value each year. It suits businesses that want a larger tax deduction sooner.
2. Prime cost method
Also called the straight-line method, or the straight line depreciation method, this claims a fixed amount each year across the car’s effective life: 12.5% of the cost per year over eight years. It is simpler and spreads the depreciation deductions evenly.
The ATO sets an effective life for cars (commonly treated as eight years), which determines the annual rate under each method. A registered tax agent can calculate both and show you which gives the better outcome for your situation. Under this method, current value falls evenly over time compared with diminishing value.
How to calculate car depreciation (step by step)
To calculate car depreciation for a business vehicle:
- Start with the cost. Use the purchase price plus costs like stamp duty and delivery, capped at the car limit for the year you bought it; for depreciation purposes, if you can claim the full GST credit, use the GST-exclusive cost, and if you cannot claim the gst credit, use the GST-inclusive cost.
- Apply your business-use percentage. From your logbook: a car used 80% for business purposes gives you 80% of the depreciable amount.
- Pick a method. Diminishing value (25% of written-down value for an eight-year effective life) or prime cost (12.5% of cost each year).
- Apportion for the year. If you bought the depreciating asset part-way through the income year, the first year’s claim is pro-rated using the following formula: annual deduction × (number of days held during the year ÷ 365).
- Track the written-down value. Each year’s claim reduces the value that next year’s diminishing value calculation runs on.
You can also use the ATO capital allowance tool to compare methods and check your inputs.
Good accounting software will calculate depreciation for you once the asset is set up, but the inputs (cost, date, percentage, method) still have to be right, and proactive tax planning strategies for small businesses can help decide how vehicle purchases fit into your overall tax position.
The car limit (depreciation cost limit)
There is a cap on how much of a car’s cost you can depreciate. If your car costs more, you can only claim depreciation up to the capped amount, not the full purchase price. That means you cannot claim depreciation on the full purchase price of luxury or other high-end passenger vehicles above the cap, including cars designed to carry fewer than nine passengers and with a load capacity of less than one tonne, and separate Luxury Car Tax rules for high-value vehicles may also apply.
The cap is set by the australian tax office and updated each financial year. For 2025-26, the car limit amount is $69,674. It is indexed annually using the consumer price index, specifically the motor vehicle purchase sub-group for motor vehicle costs, sometimes described as the motor vehicle purchase sub. The same cap also limits the GST you can claim on the vehicle.
Car depreciation vs the instant asset write-off
Depreciation is not the only way to claim a vehicle. Depending on the rules in place and your eligibility, a small business may be able to claim part or all of a vehicle’s cost immediately under the instant asset write-off, rather than depreciating it over several years.
- Depreciation spreads the tax deduction across the car’s effective life.
- Instant asset write-off claims an eligible depreciating asset’s cost (up to a threshold) in the year you buy it.
Which is better depends on your profit, cash flow and the current thresholds. For more on claiming a vehicle outright, see our guide on buying a car for business as a tax write-off and how buying a vehicle for business affects your tax position, including potential FBT and deduction issues. Note the car limit still caps the amount you can claim under either approach, and in a small business setting instant asset write-off rules for business vehicles and improvement costs for an existing asset may be treated differently from an immediate write-off depending on the rules at the time.
A worked example
Say you buy a used car for $40,000 and your logbook shows 80% business use.
- Your depreciable amount is 80% of $40,000 = $32,000 (the price is under the car limit).
- Under the prime cost method over an eight-year effective life (12.5% per year), you claim around $4,000 in a full year.
- Under the diminishing value method (25% of the written-down value), you claim about $8,000 in year one, roughly $6,000 in year two, and less each year after.
Same car, same cost, very different timing. The right method and the exact figures depend on your logbook percentage, the purchase date and the current rules, so it is worth getting them checked.
Selling the car later: the flip side
When you sell or trade in a business vehicle, the sale price is compared with its written-down value. If the car is written off or destroyed, any insurance payout is also taken into account when working out the balancing adjustment, which often matters where insurance policies pay market value rather than replacement value. Sell above the written-down value and the difference is assessable income; sell below it and you may claim the shortfall. This is where market depreciation and tax depreciation meet: a car that held its resale value well can produce a taxable balancing adjustment on the way out, and in some broader asset replacement scenarios CGT rollover relief for small businesses may let you defer gains when you change over key business assets.
Records you need
- A valid logbook (kept for a continuous 12-week period, valid for five years) to establish your business-use percentage.
- The purchase documents showing what you paid and when.
- Running-cost records if you also claim other car expenses under the logbook method.
Frequently asked questions
Can you claim depreciation on a used car?
Yes. Used car depreciation works the same way: you depreciate the amount you paid (up to the car limit), for the business-use portion, over the car’s remaining effective life.
How is car depreciation calculated in Australia?
Using either the diminishing value method (a fixed rate on the car’s declining value, more in early years) or the prime cost method (an equal amount each year), which are the two accepted methods set by the Australian Taxation Office, applied to the business-use percentage of the car’s cost and capped at the car limit set by the ATO; market depreciation rates may affect resale value, but they do not control the tax deduction.
What is the ATO car limit?
It is the maximum value of a car you can depreciate for tax. The ATO updates it each financial year, and it also caps the GST you can claim on the vehicle. Confirm the current figure with the ATO.
How much value does a car lose each year?
On the used car market, the steepest fall is in the first few years, and the exact rate depends on the make, model, kilometres and condition. For tax, the rate is fixed by the method you choose: 25% diminishing value or 12.5% prime cost for a typical eight-year effective life.
Is car depreciation the same as the instant asset write-off?
No. Depreciation spreads the deduction over the car’s effective life; the instant asset write-off lets eligible small businesses claim the cost (up to a threshold) in the year of purchase. The car limit applies to both.
Do I need a logbook to claim car depreciation?
To claim the business-use portion under the logbook method, yes. A logbook kept for 12 continuous weeks is valid for five years and establishes your business-use percentage.
Get your vehicle claim right
Choosing between depreciation and an immediate write-off, picking the right method, and managing deductions over the car ownership period can make a real difference to your tax deduction. KNS Accountants helps small businesses claim their vehicles correctly and keep the records the ATO expects, drawing on their broader accounting, taxation and business advisory services. As the right tax treatment depends on how the vehicle is used and how it is claimed, Contact KNS Accountants to make the most of your car deduction.
This article is general information only and does not take into account your personal circumstances. It is not personal tax advice. Figures such as the depreciation cost limit change each year; confirm current details with the ATO or a registered tax agent.
