How to Depreciate a Car Purchase in Australia: 2026 Tax Guide
Car depreciation is one of the most significant deductions available to Australian business owners and self-employed individuals. Understanding how to claim depreciation on your vehicle can substantially reduce your taxable income. This guide covers the depreciation rules for standard vehicles and the special considerations that apply to luxury cars under Australia's 2026 tax laws.
Understanding Car Depreciation
Depreciation is the decline in value of an asset over time. For tax purposes, the Australian Taxation Office (ATO) allows you to claim a deduction for the depreciation of a car used for business purposes. This is calculated using the diminishing value method, which is the most common approach for vehicles.
To claim depreciation, your car must be used for income-producing purposes. This includes vehicles used for business travel, client visits, or work-related activities. Private use of the vehicle reduces the amount you can claim.
Standard Car Depreciation
For a standard car purchase, depreciation is calculated using the following formula:
Annual Depreciation = (Cost Price − Residual Value) × Depreciation Rate ÷ 100
The depreciation rate depends on the age and type of vehicle. Most cars depreciate at rates between 15% and 25% per year under the diminishing value method. You'll need to apply the rate to the book value (not the original cost) each year, which means depreciation decreases annually.
Luxury Car Depreciation Rules
Luxury cars are subject to stricter depreciation rules in Australia. The ATO defines a luxury car as one with a cost price exceeding the luxury car threshold. For the 2025–26 financial year, this threshold is AUD 84,348.
If your car exceeds this threshold, depreciation deductions are capped. You can only claim depreciation on the amount up to the luxury car limit, not on the full purchase price. This means the excess amount cannot be depreciated for tax purposes.
Luxury Car Depreciation Comparison Table
| Vehicle Type | Cost Price | Depreciable Amount | Annual Depreciation (Year 1) |
|---|---|---|---|
| Standard Car | AUD 35,000 | AUD 35,000 | AUD 5,250 (15%) |
| Luxury Car (Below Threshold) | AUD 75,000 | AUD 75,000 | AUD 11,250 (15%) |
| Luxury Car (Above Threshold) | AUD 120,000 | AUD 84,348 | AUD 12,652 (15%) |
Key Points for 2026
The luxury car threshold is indexed annually and may change for the 2026–27 financial year. Always verify the current threshold with the ATO before calculating your depreciation claims.
You must maintain detailed records of your vehicle's purchase price, date of purchase, and the percentage of business use. The ATO requires evidence that the vehicle is used for income-producing purposes, so keep logbooks and receipts.
If you use your car for both business and private purposes, you can only claim depreciation on the business-use percentage. For example, if you use your car 60% for business and 40% for private use, you can only claim 60% of the depreciation.
Getting Professional Advice
Need expert guidance? Contact Ray, our tax director, at 0415 095 684 for personalised advice on your vehicle depreciation claims and tax strategy.
