Budget 2025: What is ‘accelerated depreciation’ and why might it help?

Thursday, 22 May 2025

ANALYSIS: ‘Accelerated depreciation’ sounds more like a big yawn than a vote-winning policy.

But there have been strong hints it could be a significant component of Finance Minister Nicola Willis’ Budget today.

Allowing businesses to write off investments against tax faster could provide good ‘bang for the buck’ if the Government wants to provide a quick boost to growth and productivity, says John Cuthbertson, tax leader of Chartered Accountants Australia and New Zealand.

Council of Trade Unions economist Craig Renney cautions there could be some fish-hooks.

First, just a note on what accelerated depreciation is, and isn’t.

Businesses are subject to company tax on their profits before they are distributed to shareholders.

But tax rules allow them to deduct the money they have reinvested in many ‘capital items’ such as machines, trucks and computers against those profits.

Usually, firms are only allowed to do that over a period of several years, at a pace intended to reflect the ‘depreciation’ or reduction in the value of those assets as they age over time and reach the end of their useful life.

But accelerated depreciation can allow businesses to claim the tax write-off sooner, in some cases the entire value in the same year they make the investment.

The rules never mean those investments are ‘free’ for the business, just that they can in effect be paid for out of untaxed profits.

Willis noted on Monday that letting businesses depreciate all their investments for tax purposes in the year that they made them would result in a reduction in tax revenues of $34 billion over the next four years, noting that was “obviously far too expensive”.

But asked whether some lesser changes were possible, she said she would leave comments on that to the Budget, appearing to make clear some much lesser movement was on the cards.

There are sound reasons why the Government might want businesses to bring forward investments right now.

Willis has labelled this the “growth Budget”, but many businesses have been holding back investments, in part due to uncertainties over the impact of US President Donald Trump’s policies on the global economy.

That is reflected in Reserve Bank figures that show the total value of bank loans to businesses grew by a historically feeble 1.7% — less than the rate of inflation — in the year to the end of March.

That lending declined slightly even in ‘nominal’, or non-inflation-adjusted terms, in the final two months of that period.

The Reserve Bank warned in its February monetary policy statement that it expected business investment would fall further in the “near term”, and that doesn’t add up to a recipe for economic growth.

Cuthbertson says changes to accelerated depreciation rules would be a more “targeted” way of encouraging investment than a cut to company tax.

But to make any policy changes affordable, he forecasts the Government could limit those to slightly more generous depreciation rules for investments just in plant and machinery.

“If you haven't got much money to spend on anything, your options are really limited.”

Rather than allowing more investments to be written off for tax purposes completely in their first year, the Government could perhaps increase the proportion of the cost of investments in plant and machinery that could be deducted against tax each year by 20% or 25%, Cuthbertson suggests.

That could see firms commonly able to claim depreciation at the rate of 24% or 25% each year over about four years, instead of at 20% over five.

“When you say it like that, it doesn't sound enough, does it? But a 20% or 25% uplift has got people excited in the past,” he says.

Renney cautions that assuming the Government did choose to be very selective about how it applied the incentive, in order to reduce the near-term hit to tax revenues, then it would be important to get the details right.

“You’d want to make sure that you were actually getting the kinds of investment that you wanted, rather than just encouraging people to up-size their double-cab ute.

“It is something with a lot of nuance and a lot of consultation can help.”

But at the same time, if policy-makers fiddled too long with designing new rules, that could be counter-productive, he cautions.

That is because businesses could be expected to pause investments they already had in train while they waited to see if they might get more generous treatment later.

“If you said you're were going to allow it beginning — picking a date at random — from April 1, 2026, what happens is people don't invest until April 1, 2026.”

Renney also says there are some reasons, other than cost, why tax authorities have tended to align tax write-downs with the actual reduction in the value of capital items that businesses have purchased.

“If you sell the asset, do you have to write the tax back?

“Also, if you allow someone to instantly depreciate an asset, you change their cash-flow structure so you make them much more cash-rich at the beginning. It's often about ‘time-preferencing’ money and that's a horrible story to try to sell because it’s so complicated.”

But don’t necessarily expect too much debate on the finer points of micro-economic theory on Budget day.

The priority for the Government is simple if elusive, and ‘macro’. It’s growth.