When you use a vehicle for income-producing purposes, the ATO allows you to claim the cost of the car as it declines in value over time. Motor vehicle depreciation — officially called “decline in value” — can be a significant component of your car expense deduction, particularly under the logbook method.
This guide explains how the ATO calculates depreciation, what the luxury car limit means for your claim, and what records you need.
What is motor vehicle depreciation (decline in value)?
When you purchase a car for business use, you do not deduct the full purchase price in the year you buy it. Instead, you deduct the cost spread across the car’s useful life — this is what the ATO calls “decline in value” or depreciation.
The logic is that a car is a long-term asset. Its value reduces year by year as it ages and accumulates kilometres. The ATO allows you to claim that reduction in value as a deduction, proportional to the car’s business use.
Depreciation only applies under the logbook method. If you use the cents per kilometre method, the rate already accounts for depreciation, so there is no separate claim.
How the ATO calculates depreciation
The ATO uses two main methods for calculating depreciation on a vehicle.
Prime cost method (straight-line) The cost of the vehicle is divided equally over its effective life. The ATO’s effective life for most cars is eight years. Using this method, you deduct the same dollar amount each year.
Formula: Cost × (days held / 365) × (100% / effective life in years)
Diminishing value method You apply a fixed percentage each year to the remaining book value of the car. The rate is 25% for most cars (based on an eight-year effective life). Deductions are higher in the early years and reduce over time.
Most taxpayers choose the diminishing value method because it produces a larger deduction in the first few years of ownership.
In both cases, the deduction is then reduced by your private-use percentage. If your logbook shows 65% business use, only 65% of the depreciation is deductible.
Temporary full expensing and instant asset write-off
In recent years, the Australian government introduced measures that allowed businesses to immediately deduct the full cost of eligible depreciating assets rather than spreading the cost over their useful life.
Temporary full expensing applied from 6 October 2020 to 30 June 2023 and allowed most businesses to write off the full cost of a new or eligible used car in the year of purchase (subject to the luxury car limit).
Instant asset write-off has continued in various forms. For the 2024-25 and 2025-26 income years, the threshold is $20,000 for small businesses (aggregated turnover under $10 million). Vehicles costing more than $20,000 must be depreciated using a general small business pool rather than claimed immediately.
These rules apply to businesses, not individual employees. If you are an employee using your own car for work, you cannot access instant asset write-off — you must use standard depreciation under the logbook method.
Always check the current rules each income year, as thresholds and eligibility can change with the federal budget.
Luxury car tax limit and depreciation
The ATO sets a luxury car limit (also called the car limit) that caps the amount of a vehicle’s cost you can use as the basis for depreciation. For the 2025-26 income year, the car limit is $69,674.
If you purchase a vehicle for $100,000, you can only claim depreciation on $69,674 of the purchase price — even if you use the car 100% for business. The portion above the car limit is not deductible.
The car limit applies to both the prime cost and diminishing value methods. It does not affect the calculation of running costs (fuel, insurance, servicing), which are deductible in full based on your business-use percentage.
Fuel-efficient vehicles (those with emissions below a specified threshold) may have a higher car limit under the luxury car tax rules, but the depreciation cap generally follows the standard car limit.
Depreciation with the logbook method
When you use the logbook method, your depreciation calculation works as follows:
- Determine the depreciation on the vehicle for the year using your chosen method (prime cost or diminishing value)
- Apply your business-use percentage from your logbook to that figure
- Add the adjusted depreciation to your other car expenses (fuel, insurance, registration, etc.)
- The total is your car expense deduction for the year
Example:
- Vehicle cost: $60,000
- Diminishing value rate: 25%
- Depreciation in year one: $15,000
- Business-use percentage: 70%
- Deductible depreciation: $10,500
If you are also claiming GST credits (for sole traders registered for GST), the depreciation calculation is based on the GST-exclusive cost, not the GST-inclusive price.
For the full picture on choosing between methods, see our ATO car expense guide.
Keeping the right records
Claiming motor vehicle depreciation under the ATO requires solid documentation.
Proof of purchase: Keep the original invoice or contract showing the purchase price, date of purchase, and vehicle details.
Logbook: A valid 12-week logbook establishing your business-use percentage. See our ATO logbook requirements guide for what each entry must contain.
Opening book value: For vehicles you have owned for more than one year, you need to track the running balance of the vehicle’s book value (cost minus accumulated depreciation claimed in previous years).
Odometer readings: Record the odometer at 1 July and 30 June each income year. You also need the odometer reading when you first started using the vehicle for business.
All records must be kept for five years after you lodge the tax return for the relevant income year.
Using Tripbook to record your kilometres throughout the year ensures your logbook is accurate and ready when your accountant needs it to finalise your depreciation claim.
