Tax Deductions You Can Claim
When you finance machinery for business use, the ATO allows deductions across multiple categories. The exact mix depends on your finance structure:
| Deduction Type | Chattel Mortgage | Finance Lease | Operating Lease |
|---|---|---|---|
| Depreciation | ✅ You claim | ✅ You claim | ❌ Lessor claims |
| Interest/Finance charges | ✅ Deductible | ✅ (embedded in payment) | N/A |
| Lease payments | N/A | N/A | ✅ Fully deductible |
| GST credit | ✅ Upfront | ✅ Progressive | ✅ Progressive |
| Instant Asset Write-Off | ✅ If eligible | ✅ If eligible | ❌ |
| Running costs | ✅ | ✅ | ✅ (may be bundled) |
Depreciation Methods
The ATO allows two methods for depreciating machinery:
Diminishing Value Method
Front-loads deductions — higher deductions in earlier years, declining over time. Calculated as:
Base value × (days held ÷ 365) × (200% ÷ effective life)
Best for: businesses wanting maximum short-term deductions.
Prime Cost (Straight-Line) Method
Equal deductions each year over the asset's effective life. Calculated as:
Cost × (days held ÷ 365) × (100% ÷ effective life)
Best for: businesses wanting predictable, even deductions across years.
Example: $200,000 CNC Machine (Effective Life 10 Years)
Diminishing value: Year 1 = $40,000, Year 2 = $32,000, Year 3 = $25,600...
Prime cost: Year 1 = $20,000, Year 2 = $20,000, Year 3 = $20,000...
Diminishing value gives $20,000 more deductions in Year 1 alone.
Instant Asset Write-Off
Under the temporary full expensing provisions (check current ATO thresholds), eligible businesses can deduct the full cost of a depreciating asset in the year it's first used or installed. This has been a game-changer for machinery purchases:
- Applies to new and second-hand assets
- No per-asset limit (for eligible businesses)
- Must be first used or installed ready for use in the relevant income year
- Available under chattel mortgage and finance lease (you must claim depreciation)
- Not available under operating lease (the lessor claims depreciation)
Impact Example
A construction company buys a $300,000 excavator in March 2026 using chattel mortgage.
Without instant write-off: Year 1 depreciation = $60,000 (diminishing value over 12 years)
With instant write-off: Year 1 deduction = $300,000
At a 25% company tax rate, that's $75,000 in tax savings in Year 1.
Interest Deductions
Under a chattel mortgage or hire purchase, the interest component of each repayment is deductible as a business expense. Over a typical 5-year loan, interest can total 15–30% of the asset's value — a significant deduction.
Under a finance or operating lease, the finance charge is embedded in the lease payment and deducted as part of the total lease cost.
GST Credits on Machinery
If you're GST registered and the machinery is for business use:
- Chattel mortgage: Claim the full purchase price GST (1/11th of the price) in your next BAS
- Finance lease: Claim GST on each rental payment progressively
- Operating lease: Claim GST on each rental payment progressively
For a $220,000 machine, the chattel mortgage GST credit of $20,000 in one hit is a significant cash flow boost.
ATO Effective Life for Common Machinery
| Machinery Type | Effective Life | Diminishing Value Rate |
|---|---|---|
| CNC machines | 10 years | 20% |
| Excavators | 12 years | 16.67% |
| Forklifts | 11 years | 18.18% |
| Lathes & milling machines | 15 years | 13.33% |
| Welding equipment | 10 years | 20% |
| Air compressors | 15 years | 13.33% |
| Concrete batching plant | 20 years | 10% |
| Cranes (mobile) | 20 years | 10% |
You can use the ATO's effective life determination or self-assess a different effective life if you can justify it (e.g., heavy use that shortens the life).
Frequently Asked Questions
Under chattel mortgage, you are the legal owner from day one — you claim depreciation. Under finance lease, you claim depreciation as the "economic owner." Under operating lease, the lessor claims depreciation (but you deduct the full lease payment instead).
If you want maximum deductions in the early years (especially useful if your income is high now), use diminishing value. If you want even, predictable deductions, use prime cost. Once chosen, you can't switch methods for that asset. If the instant write-off applies, the method is irrelevant — you deduct 100% in Year 1.
Yes. Repairs that restore the machinery to its original condition are immediately deductible. Improvements that enhance the machinery beyond its original state may need to be depreciated separately.
See Your Tax Savings by Structure
Our calculator models depreciation, interest deductions, and GST credits for each finance structure.
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