Depreciation Recapture Australia 2025: Key Rules, Impacts, and Strategies

Depreciation is a valuable tax deduction for Australian property investors and business owners, but what happens when it’s time to sell? In 2025, changing ATO guidelines and rising asset values have put depreciation recapture firmly on the radar. Whether you’re offloading a commercial building, rental property, or business equipment, understanding how depreciation recapture works—and how it impacts your tax bill—can help you avoid surprises and maximise your returns.

What Is Depreciation Recapture?

Depreciation recapture refers to the process where the Australian Taxation Office (ATO) ‘recaptures’ some or all of the depreciation deductions you claimed on an asset when you dispose of it for more than its written-down value. This often applies to property investors, business owners, and anyone selling depreciable assets.

• For property investors, this means plant and equipment (like air conditioners or carpets) and building write-off deductions you’ve claimed over the years may need to be added back as assessable income when you sell.

• For business owners, plant, equipment, and vehicles are subject to balancing adjustments and potential recapture when sold or scrapped.

In essence, you can’t claim depreciation indefinitely without the tax office clawing some of it back if the asset is disposed of above its depreciated value.

How Depreciation Recapture Works in Australia in 2025

The mechanics of depreciation recapture in Australia differ from the US, but the principle remains: you may owe tax on previously claimed deductions if you sell an asset for more than its tax written-down value. Here’s how it works in 2025:

• Plant and equipment (Division 40 assets) are adjusted through a ‘balancing adjustment’ event. If the sale price exceeds the asset’s written-down value, the excess is added to your assessable income.

• Capital works deductions (Division 43) are ‘recaptured’ by reducing your capital gain by the amount claimed, effectively increasing your CGT liability.

• Instant Asset Write-Off: In 2025, the ATO’s $20,000 instant asset write-off for small businesses remains in place. However, if you dispose of an asset claimed under this measure, any proceeds above $0 are added to your assessable income.

Example: Imagine you bought a commercial oven for $30,000 in 2022 and claimed depreciation so its written-down value is $10,000 in 2025. If you sell it for $18,000, the $8,000 excess is assessable income in your 2025 tax return.

For property, if you’ve claimed $40,000 in capital works deductions on a rental, that $40,000 reduces your cost base, so you’ll pay more capital gains tax when you sell.

Who Is Impacted by Depreciation Recapture?

Depreciation recapture affects a wide range of Australians, but it’s especially relevant for:

• Property investors selling residential or commercial property that’s been depreciated

• Business owners disposing of plant, equipment, or vehicles

• Farmers and tradies who have claimed large deductions on tools or infrastructure

• SMSFs with property or depreciable assets

The 2025 focus on compliance means the ATO is scrutinising asset sales more closely, especially where significant depreciation deductions have been claimed. Failing to account for recapture can result in unexpected tax bills, penalties, and interest charges.

Strategies to Manage Depreciation Recapture in 2025

While you can’t avoid depreciation recapture entirely, smart planning can help reduce its sting:

• Time your asset sales to offset recapture income with other losses or lower-income years.

• Review cost bases for property to ensure all eligible costs are included (e.g., purchase expenses, improvement costs).

• Keep detailed records of depreciation schedules, asset values, and sale prices to streamline your tax reporting.

• Consider the small business CGT concessions if eligible, which can reduce or eliminate capital gains and recapture liabilities.

• Work with a tax professional to model the after-tax impact before selling major assets, especially as 2025 sees greater ATO data-matching and enforcement.

Recent updates from the May 2025 Federal Budget have reinforced the ATO’s commitment to digital asset tracking and data-matching, so accurate reporting is more important than ever.

Conclusion: Don’t Let Depreciation Recapture Catch You Out

Depreciation is a powerful tool for reducing taxable income, but it comes with strings attached at sale time. In 2025, with asset values strong and compliance activity high, understanding depreciation recapture is essential for property investors and business owners alike. Know your numbers, keep your records tight, and plan your asset disposals with an eye on the bigger tax picture.