The words
Six words that do the work
- Decline in value
- The ATO’s term for depreciation. Under the uniform capital allowance rules the decline begins on the first day the asset is used, or installed ready for use, whatever the purpose, private use included. Only the time it spends on a taxable purpose can be claimed.
- Cost
- What you paid for the asset, plus amounts spent transporting it, installing it and improving it. If you are entitled to claim the GST, the cost excludes it.
- Effective life
- How long anyone at all could use the asset for one of the specified purposes, earning assessable income being one of them. The ATO describes it as assuming reasonably expected wear and tear and reasonably good maintenance.
- Prime cost
- Also called straight line. It assumes the value falls uniformly over the effective life, so the claim is the same each full year.
- Diminishing value
- It assumes the value falls more in the early years: each year’s claim is a constant proportion of what has not yet been written off, so the claims get smaller over time.
- Adjustable value
- In the ATO’s words, the cost of the asset less depreciation deductions. It is the figure compared with the sale price, or an insurance payout, when you stop holding the asset.
The two methods
The formulas, as the ATO writes them
Base value is the cost less the decline in value up to the end of the previous income year. Days held can be 366 in a leap year. For assets you started to hold before 10 May 2006, the diminishing value formula uses 150% rather than 200%.
Worked example
One asset, both methods, four years
Example only · made-up figures
An asset costs $9,000, excluding GST. Its effective life is taken to be 4 years for this example; that is an assumption, not a determination. It is held for every day of each income year and used only for the business. Prime cost claims 100% ÷ 4 = 25% of cost a year; diminishing value claims 200% ÷ 4 = 50% of the base value a year.
| Income year | Prime cost claim | Prime cost value left | Diminishing value claim | Diminishing value left |
|---|---|---|---|---|
| Year 1 | $2,250 | $6,750 | $4,500 | $4,500 |
| Year 2 | $2,250 | $4,500 | $2,250 | $2,250 |
| Year 3 | $2,250 | $2,250 | $1,125 | $1,125 |
| Year 4 | $2,250 | $0 | $562.50 | $562.50 |
Prime cost reaches zero at the end of year 4. Diminishing value is not at zero after year 4, though the ATO says its claims continue until the value reaches zero, and after year 4 there is still $562.50 left on this line.
There is a shortcut for that tail. Once an asset’s value falls below $1,000 you can choose to move what is left into a low-value pool and depreciate it with other low-value assets, rather than calculating each one separately. Here, the diminishing value line drops below $1,000 at the end of year 4.
If the asset is also used privately
Under either method, the claim is reduced by the share of private use. The ATO’s own illustration: an asset used 40% of the time privately has its deduction cut by 40%, so every figure is multiplied by 0.6. In this example, 25% private use would turn the year 1 prime cost claim of $2,250 into $1,687.50.
Effective life
Where the effective life comes from
You either adopt the Commissioner’s determination, currently in the Income Tax (Effective Life of Depreciating Assets) Determination 2025, or self-assess the life. In some situations there is no choice. For example, an asset acquired from an associate such as a spouse or business partner keeps the associate’s effective life (or what remains of it, if they used the prime cost method), and some intangible assets, including intellectual property, must use their statutory effective life. If you self-assess, the ATO asks for details of how you worked it out, so that reasoning belongs on the asset’s line in the register.
Small business
A simpler path for small business
Everything above is the general depreciation rules. A small business with an aggregated turnover under $10 million can choose the simplified depreciation rules instead, which include an instant asset write-off for assets costing less than the limit, and a small business pool. AR-0003 covers both. For any single year, the ATO’s Depreciation and capital allowances tool compares the results of the two methods.