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What is depreciation for Tax Purposes?

What is Depreciation for tax purposes

Depreciation is the term used to describe the decline in value of an asset over the asset’s effective life. For example, a new car purchased today is not worth the same amount after it is driven from the dealership.

Depreciation is an important concept for business owners and managers to understand.

The non-monetary reduction in value of an asset needs to be recorded as an expense to accurately reflect the asset's value to the business

Depreciation is defined over the effective/useful life of the asset. This is the amount of time, usually expressed in years, the asset is likely to be useful for.

For tax purposes, there are 2 methods available to record depreciation:

  1. Decline in Value – which when calculated yields a higher depreciation amount in year 1, with less depreciation recorded over each subsequent year in gradual curve down to the end of the effective life of the asset.

  2. Prime Cost (Straight Line) – which when calculated yields lower depreciation in year 1 but stays at a constant depreciation amount over the effective life of the asset.

You can use either method, however the method needs to be consistent across all assets in that class of assets.

Currently small business entities (SBE's) have access to the instant asset write-off, whereby assets valued under $20,000 can be immediately be fully depreciated in the year of purchase.

Current legislation has this tax concession reducing to assets with a value less than $1,000 from 1 July 2020. Therefore, understanding depreciation of a business's assets will become more important in future years (assuming the state of the law doesn't change).


This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice

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