Depreciation in NZ: How It Works for Small Business Owners

When your business buys a piece of equipment, a vehicle, or a computer, you cannot usually deduct the full cost in the year of purchase. Instead, you claim the cost gradually over the asset's useful life — this is depreciation.

Understanding depreciation is worth your time. It affects your tax bill every year, and there are legitimate ways to accelerate your deductions if you know the rules.

Depreciation is the recognition that assets lose value over time through wear and tear, obsolescence, or use. IRD allows you to deduct this loss in value as a business expense each year.

The key point: depreciation is a non-cash deduction. You are not spending money each year — you are spreading the cost of something you already bought across multiple tax years.

You can depreciate any asset used in your business that:

• Has a useful life of more than one year
• Loses value over time
• Is used to earn income

Common depreciable assets include vehicles, computers and IT equipment, office furniture, plant and machinery, and commercial fit-out costs. Land cannot be depreciated. Buildings can be depreciated, but at very low rates (typically 0–2% per annum).

The most common method. You apply the depreciation rate to the remaining book value of the asset each year. This means you claim more in the early years and less as the asset ages.

Example: $10,000 computer at 50% DV

• Year 1: $10,000 × 50% = $5,000 deduction. Book value: $5,000
• Year 2: $5,000 × 50% = $2,500 deduction. Book value: $2,500
• Year 3: $2,500 × 50% = $1,250 deduction. Book value: $1,250

You apply the rate to the original cost each year. The deduction is the same every year until the asset is fully depreciated.

Most businesses use diminishing value because it gives larger deductions in the early years when the asset is most useful.

IRD publishes depreciation rates for hundreds of asset types. Some common examples:

You can look up the rate for any specific asset on IRD's depreciation rate finder at ird.govt.nz.

One of the most useful rules for small businesses: assets costing $1,000 or less (excluding GST) can be fully deducted in the year of purchase rather than depreciated over time.

This means if you buy an $800 chair, a $600 monitor, or a $950 power tool, you can claim the full cost as an expense immediately — no depreciation calculation required.

When you sell a depreciable asset, you may have a depreciation recovery — a taxable gain — if you sell it for more than its book value.

Example:

• You bought a vehicle for $30,000
• You have claimed $15,000 in depreciation over 3 years
• Book value is now $15,000
• You sell it for $20,000
• Depreciation recovery = $20,000 − $15,000 = $5,000 taxable income

Conversely, if you sell for less than book value, you have a loss on disposal — a deductible expense.

For passenger vehicles, IRD caps the depreciation base at $57,143 (as at 2024 — check current guidance). If you buy a $90,000 SUV, you can only depreciate it as if it cost $57,143.

This limit does not apply to commercial vehicles (utes, vans, trucks used primarily for business).

If an asset is used for both business and personal purposes, you can only claim the business-use proportion of depreciation. Keep records to support your business-use percentage — for vehicles, a logbook is the standard method.

A fixed asset register records all your depreciable assets including description, date of purchase, original cost, depreciation method and rate, accumulated depreciation, and current book value. Xero and most accounting software maintain this automatically once assets are set up correctly.

Buy assets before 31 March — buying before the end of the tax year means you get a depreciation deduction for that year.

Use the low-value threshold — for assets under $1,000, claim the full cost immediately rather than setting them up as depreciable assets.

Get a depreciation schedule for fit-outs — if you are fitting out commercial premises, a quantity surveyor's depreciation schedule can identify components that depreciate faster than the building as a whole.

Review your asset register annually — assets that are no longer in use or have been disposed of should be removed from the register.

Depreciation is one of those areas where the details matter. If you would like help setting up your fixed asset register or reviewing your depreciation claims, contact Eastmure & Associates.