Your car loses value the moment you drive it off the dealership lot. This drop in value is called depreciation. It represents the difference between what you paid for your vehicle and what it’s worth today. Most new cars lose 10 to 15% of their value immediately after purchase, followed by another 10 to 15% by the end of the first year. Depreciation continues throughout your ownership, making it the single biggest ongoing cost of owning a car in Australia. Understanding how this process works helps you save money and make better choices when buying or selling.
This guide explains how car depreciation works in Australia. You’ll learn how to calculate depreciation using ATO approved methods, understand the car limit rules for tax deductions, and discover which factors speed up or slow down your vehicle’s value loss. Whether you’re buying your first car, claiming tax deductions for a work vehicle, or trying to maximise your resale value when you sell, this article gives you the practical knowledge you need to make smarter financial decisions about your car and protect your investment over time.
Why car depreciation matters in Australia
Depreciation directly impacts your wallet more than most car owners realise. Studies show that typical vehicles lose up to 58% of their initial value after three years of ownership. This means if you paid $40,000 for a new car, it could be worth just $16,800 three years later. That’s $23,200 in lost value, making depreciation your largest ownership cost beyond the purchase price itself. Understanding how car depreciation works gives you the power to reduce this financial drain and keep more money in your pocket.
Financial planning and ownership costs
Your car’s depreciation rate determines how much you lose each year you own it. Weekly depreciation costs vary dramatically between models. A Fiat 500 Pop loses around $38.75 per week, while a Mazda CX-9 Sport loses $106.83 per week according to RACQ data. These numbers add up to thousands of dollars annually. When you factor in depreciation alongside fuel, insurance, and maintenance, you can accurately budget for true ownership costs. Smart buyers use depreciation rates to compare vehicles and choose models that retain value better over time.
Tax deductions and resale planning
Business owners and self-employed individuals can claim depreciation as a tax deduction when their vehicle generates taxable income. The ATO allows you to depreciate work-related vehicles over five years using approved calculation methods. This turns your vehicle’s declining value into a legitimate tax benefit. Understanding depreciation also helps you time your sale strategically. Cars depreciate fastest in year one, then slow down. Selling at the right moment maximises your return and minimises your total loss.
Knowing when and how your car loses value helps you make smarter decisions about when to sell, what to buy next, and how much to claim on your tax return.
How to calculate car depreciation
Two official calculation methods exist for working out how car depreciation works in Australia. The Australian Tax Office recognises both approaches for business tax purposes, but you can also use them to estimate depreciation for personal planning. The prime cost method assumes your car loses value evenly each year, while the diminishing value method assumes faster depreciation in early years. Both methods require three pieces of information: your vehicle’s cost, the number of days you’ve owned it, and its effective life (typically eight years for cars under ATO guidelines).
The prime cost method (straight line)
This method calculates depreciation as a fixed percentage of your car’s original purchase price each year. The vehicle loses the same dollar amount annually regardless of age. You calculate the annual depreciation using this formula:
Asset’s Cost × (Days Owned ÷ 365) × (100% ÷ Effective Life in Years)
For example, if you bought a $30,000 car and owned it for a full year with an eight year effective life, your calculation would be: $30,000 × (365 ÷ 365) × (100% ÷ 8) = $3,750 annual depreciation. This method works well when you want predictable, consistent depreciation amounts that make budgeting straightforward. Your car loses the same value in year eight as it did in year one.
The diminishing value method
This approach reflects how real world vehicle values actually decline by calculating higher depreciation in early ownership years. Your car’s base value decreases each year, so the depreciation amount also decreases over time. The formula changes based on when you acquired your vehicle:
For vehicles acquired after 10 May 2006:
Base Value × (Days Owned ÷ 365) × (200% ÷ Effective Life in Years)
For vehicles acquired before 10 May 2006:
Base Value × (Days Owned ÷ 365) × (150% ÷ Effective Life in Years)
Using the same $30,000 car example with the 200% formula, your first year depreciation would be: $30,000 × (365 ÷ 365) × (200% ÷ 8) = $7,500 in year one. The second year calculation uses your reduced base value of $22,500, giving you $5,625 depreciation. This method matches market reality better because cars genuinely lose more value when new.
The diminishing value method typically provides larger tax deductions early in ownership, while the prime cost method spreads deductions evenly across all years.
ATO methods, limits and car rules
Understanding how car depreciation works under Australian tax law requires knowledge of specific ATO rules and limits. The tax office sets strict guidelines about which vehicles qualify for depreciation deductions, how much you can claim, and what documentation you need. These rules apply when you use your vehicle to generate taxable income, whether you’re self-employed, run a business, or work as an employee claiming car expenses. You can’t claim depreciation if you use the cents per kilometre method for your car expenses, because that calculation already includes depreciation in the per-kilometre rate.
The car limit for depreciation claims
The ATO imposes a maximum cost limit on passenger vehicles when calculating depreciation. This limit applies to cars designed to carry fewer than nine passengers and less than one tonne of load (excluding motorcycles). For the 2025-26 financial year, the car limit sits at $69,674. Even if you paid $90,000 for a luxury vehicle, you can only use $69,674 as your cost figure in depreciation calculations. The limit updates annually based on movements in the motor vehicle purchase sub-group of the consumer price index.
Your depreciation deduction gets calculated using the car limit amount, not your actual purchase price. This cap protects against excessive tax deductions on high-end vehicles while still allowing reasonable claims for standard business cars. The limit applies from the moment you first use or lease your vehicle for business purposes.
Business use percentage requirements
You must calculate the exact percentage your vehicle serves business purposes versus private use. The ATO requires you to claim depreciation only on the business-use portion of your car’s value. If you use your vehicle 60% for work and 40% for personal trips, you multiply your calculated depreciation by 60% to find your actual deduction amount. This business-use percentage directly affects your claim size and determines your annual tax benefit.
The tax office expects you to review your business-use estimate in each of the first three years of ownership. When your usage proportion changes by more than 10% from your most recent estimate, you must make an adjustment to your depreciation pool balance. You’ll need documentation like a logbook to prove your business-use percentage if the ATO requests evidence during an audit.
GST and your depreciation cost
Your GST registration status changes how you calculate depreciation costs. When you’re registered for GST and can claim the full GST credit, you exclude the GST amount from your vehicle’s cost in depreciation calculations. A car with a $33,000 price tag including GST becomes $30,000 for depreciation purposes when you claim back the $3,000 GST component. This reduces your depreciable base but increases your immediate GST refund.
If you’re not registered for GST, you include the full GST-inclusive price in your depreciation calculations. The instant asset write-off limit becomes inclusive of GST for non-registered businesses, while it remains GST-exclusive for registered businesses. You can claim only a partial reduction in cost when you’re entitled to claim just a portion of the GST credit.
Understanding these ATO rules helps you maximise legitimate deductions while staying compliant with tax law and avoiding costly audit issues.
Factors that affect your car’s value
Multiple elements influence how car depreciation works for your specific vehicle. Understanding these factors helps you predict your car’s future value and make informed decisions about purchase timing, maintenance priorities, and resale strategies. Some factors sit within your control, while others reflect broader market forces and manufacturing decisions that you can only account for when choosing which vehicle to buy in the first place.
Age and kilometres driven
Your car’s age creates the most predictable depreciation pattern. New vehicles lose 10 to 15% of their value immediately upon leaving the dealership, followed by another 10 to 15% decline by the end of year one. The odometer reading compounds this effect. Higher mileage signals more wear on engine components, suspension systems, and interior materials. The Department of Transportation sets average annual mileage at 13,500 kilometres. Vehicles exceeding this benchmark typically face steeper depreciation because buyers perceive them as having shorter remaining lifespans and higher upcoming maintenance costs.
Brand reputation and vehicle type
Strong, established brands like Toyota, Mazda, Honda, and Ford hold value better than lesser-known manufacturers. Brand reputation directly correlates with buyer confidence, which supports resale prices over time. Vehicle type matters equally. SUVs currently depreciate slower than sedans due to high Australian market demand. A Toyota Corolla Ascent Sport Hybrid loses just 9.45% value initially, while a Tesla Model 3 Performance AWD drops 50.86% according to industry data. Luxury vehicles depreciate fastest because they cost more to maintain and attract smaller buyer pools in the used market.
Condition and maintenance history
Physical condition determines whether your car achieves book value or sells below market rate. Visible damage, interior wear, and mechanical issues accelerate depreciation beyond normal age-based declines. Complete service records prove consistent maintenance and reassure buyers about reliability. Accident history appears in vehicle reports and reduces value even after expert repairs, as buyers question whether restoration matched factory standards. Cars with clean histories and documented servicing schedules command premium prices in competitive markets.
Choosing high-demand brands and maintaining detailed service records gives you the most control over minimising depreciation throughout ownership.
Ways to slow car depreciation
You can’t stop depreciation entirely, but you can significantly reduce how fast your car loses value. Strategic choices during purchase and consistent care throughout ownership create measurable differences in your vehicle’s resale price. Understanding how car depreciation works empowers you to take specific actions that protect your investment and minimise your total ownership costs over the years ahead.
Choose vehicles that hold value
Select makes and models with proven resale strength before you buy. Toyota, Mazda, and Honda vehicles consistently depreciate slower than luxury brands or less established manufacturers. Automatic transmission vehicles retain more value than manual options in the Australian market. Colour choices matter to future buyers, with white, black, red, and silver finishes commanding better resale prices. SUVs currently depreciate slower than sedans due to sustained market demand. You’ll also save money by buying a nearly new car that’s already experienced its steepest initial value drop, then selling it before heavy depreciation accelerates again.
Maintain your car consistently
Regular servicing protects your vehicle’s mechanical condition and proves proper care to future buyers. Keep detailed service records with stamped logbooks that demonstrate maintenance history. Scheduled servicing reduces wear on engines, tyres, and other components that affect both performance and appearance. Limit your annual mileage where practical to keep odometer readings below the 13,500 kilometre average. Clean your car regularly inside and out to prevent deterioration and maintain appeal. Address minor damage immediately rather than letting small issues compound into larger problems that hurt resale value.
Buying the right vehicle initially and maintaining it properly throughout ownership gives you the strongest defence against excessive depreciation losses.
Bringing it all together
Understanding how car depreciation works gives you control over your largest ongoing vehicle ownership cost. You now know the ATO calculation methods, the factors that accelerate value loss, and the practical steps you can take to slow depreciation throughout ownership. Your car will lose value regardless of which model you choose, but smart purchasing decisions and consistent maintenance significantly reduce the total amount you lose over time. Calculating depreciation accurately helps you time sales strategically, maximise tax deductions for business vehicles, and budget realistically for replacement costs when the time comes.
Protecting your vehicle’s remaining value requires more than just routine maintenance and careful driving habits. Comprehensive car insurance from National Cover safeguards your investment against accidents, theft, and damage that can devastate resale prices while keeping your premiums competitive and your coverage strong.
