Depreciation Rate for Hand Tools in Australia (2026 ATO Guide)
What Is the Depreciation Rate for Hand Tools in Australia?
According to the Australian Taxation Office (ATO), hand tools have a effective life of 5 years. This gives you two depreciation rate options:
| Method | Rate | How It Works |
|---|---|---|
| Diminishing Value | 40.00% | Higher deductions in earlier years |
| Prime Cost | 20.00% | Equal deductions each year |
Diminishing value rate = 200% ÷ effective life (200% ÷ 5 = 40.00%). Prime cost rate = 100% ÷ effective life (100% ÷ 5 = 20.00%).
Worked Example: $500 Hand Tools
Purchase hand tools for $500 on 1 July 2025 (start of the financial year) for a full-year deduction:
Diminishing Value Method (40.00%)
| Financial Year | Opening Value | Deduction | Closing Value |
|---|---|---|---|
| 2025–26 | $500 | $200 | $300 |
| 2026–27 | $300 | $120 | $180 |
| 2027–28 | $180 | $72 | $108 |
| 2028–29 | $108 | $43 | $65 |
| 2029–30 | $65 | $26 | $39 |
| 2030–31 | $39 | $16 | $23 |
| 2031–32 | $23 | $9 | $14 |
Prime Cost Method (20.00%)
| Financial Year | Opening Value | Deduction | Closing Value |
|---|---|---|---|
| 2025–26 | $500 | $100 | $400 |
| 2026–27 | $400 | $100 | $300 |
| 2027–28 | $300 | $100 | $200 |
| 2028–29 | $200 | $100 | $100 |
| 2029–30 | $100 | $100 | $0 |
Which method is better? Diminishing value gives you $200 in Year 1 vs $100 with prime cost. Most small businesses prefer diminishing value for the bigger upfront deduction.
First-Year Pro-Rata Rule
If you purchase the tool set partway through the financial year, your first-year deduction is pro-rated based on the number of days you held the asset.
Example: Buy hand tools for $500 on 1 January 2026 (181 days remaining in the FY).
- Diminishing value: $500 × 40.00% × (181/365) = $99
- Prime cost: $500 × 20.00% × (181/365) = $50
Instant Asset Write-Off
If your tool set 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 5 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 “Hand Tools” for ATO Purposes?
The ATO’s 5-year effective life applies to:
- Hammers, screwdrivers, and wrenches
- Socket sets and spanner sets
- Measuring tools (tape measures, levels)
- Plumbing and electrical hand tools
- Gardening tools used for business
Power tools share the same 5-year effective life. Individual tools under $300 can often be claimed as an immediate deduction.
How to Claim Depreciation
- Must be used for business purposes. Only claim the business-use percentage. If you use the tool set 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 “Hand Tools” and enter the purchase price and date.
Frequently Asked Questions
What is the ATO effective life for hand tools?
The ATO sets the effective life at 5 years for hand tools.
Should I use diminishing value or prime cost?
Most small businesses use diminishing value because it gives a bigger deduction in the first year ($200 vs $100 on a $500 tool set).
Can I claim the full cost as an immediate deduction?
If the tool set 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 tool set 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.