Depreciation Rate for Cars in Australia (2026 ATO Guide)
What Is the Depreciation Rate for a Car in Australia?
According to the Australian Taxation Office (ATO), cars have an effective life of 8 years. This gives you two depreciation rate options:
| Method | Rate | How It Works |
|---|---|---|
| Diminishing Value | 25.00% | Higher deductions in earlier years |
| Prime Cost | 12.50% | Equal deductions each year |
Diminishing value rate = 200% ÷ effective life (200% ÷ 8 = 25.00%). Prime cost rate = 100% ÷ effective life (100% ÷ 8 = 12.50%).
Worked Example: $40,000 Car
Purchase a car for $40,000 on 1 July 2025 (start of the financial year) for a full-year deduction:
Diminishing Value Method (25.00%)
| Financial Year | Opening Value | Deduction | Closing Value |
|---|---|---|---|
| 2025–26 | $40,000 | $10,000 | $30,000 |
| 2026–27 | $30,000 | $7,500 | $22,500 |
| 2027–28 | $22,500 | $5,625 | $16,875 |
| 2028–29 | $16,875 | $4,219 | $12,656 |
| 2029–30 | $12,656 | $3,164 | $9,492 |
| 2030–31 | $9,492 | $2,373 | $7,119 |
| 2031–32 | $7,119 | $1,780 | $5,339 |
| 2032–33 | $5,339 | $1,335 | $4,004 |
| 2033–34 | $4,004 | $1,001 | $3,003 |
| 2034–35 | $3,003 | $751 | $2,252 |
Prime Cost Method (12.50%)
| Financial Year | Opening Value | Deduction | Closing Value |
|---|---|---|---|
| 2025–26 | $40,000 | $5,000 | $35,000 |
| 2026–27 | $35,000 | $5,000 | $30,000 |
| 2027–28 | $30,000 | $5,000 | $25,000 |
| 2028–29 | $25,000 | $5,000 | $20,000 |
| 2029–30 | $20,000 | $5,000 | $15,000 |
| 2030–31 | $15,000 | $5,000 | $10,000 |
| 2031–32 | $10,000 | $5,000 | $5,000 |
| 2032–33 | $5,000 | $5,000 | $0 |
Which method is better? Diminishing value gives you $10,000 in Year 1 vs $5,000 with prime cost. Most small businesses prefer diminishing value for the bigger upfront deduction.
First-Year Pro-Rata Rule
If you purchase the car partway through the financial year, your first-year deduction is pro-rated based on the number of days you held the asset.
Example: Buy a car for $40,000 on 1 January 2026 (181 days remaining in the FY).
- Diminishing value: $40,000 × 25.00% × (181/365) = $4,959
- Prime cost: $40,000 × 12.50% × (181/365) = $2,479
Instant Asset Write-Off
If your car costs less than the instant asset write-off threshold ($20,000 for the 2024–25 income year), you may be able to deduct the entire cost immediately rather than depreciating over 8 years. This applies to small businesses with aggregated turnover under $10 million.
Always check the current ATO guidance as thresholds can change each financial year.
What Counts as “Cars” for ATO Purposes?
The ATO’s 8-year effective life applies to:
- Sedans, hatchbacks, and wagons
- SUVs under 1 tonne carrying capacity
- Electric and hybrid vehicles
- Any motor vehicle designed to carry fewer than 9 passengers
Note: the car depreciation limit applies — for the 2024–25 income year, the cost limit is $68,108. You can only depreciate up to this limit, not the full purchase price. Utes and vans have the same 8-year effective life but are not subject to the car limit.
How to Claim Depreciation
- Must be used for business purposes. Only claim the business-use percentage. If you use the car 70% for work, claim 70% of the depreciation.
- Choose your method — diminishing value or prime cost. You must stick with the same method for the life of that asset.
- Keep records — purchase receipt, proof of business use percentage, and your depreciation schedule.
- Report in your tax return — include the deduction amount in your business expenses or work-related deductions.
Calculate Your Depreciation
Use our free depreciation calculator to get an instant depreciation schedule — just select “Car” and enter the purchase price and date.
Frequently Asked Questions
What is the ATO effective life for cars?
The ATO sets the effective life at 8 years for cars.
Should I use diminishing value or prime cost?
Most small businesses use diminishing value because it gives a bigger deduction in the first year ($10,000 vs $5,000 on a $40,000 car).
Can I claim the full cost as an immediate deduction?
If the car costs less than the instant asset write-off threshold and you are an eligible small business, yes — you can deduct the full cost in the year of purchase. If you also use it personally, only claim the business-use percentage.
What if I sell or dispose of the car before it’s fully depreciated?
You’ll need to do a balancing adjustment. If you sell it for more than the written-down value, the difference is assessable income. If you sell for less, you can claim the remaining amount as a deduction.