When a business buys something that lasts for years, such as a ute, a laptop or an oven, the cost is spread over the asset’s life rather than claimed all at once. That spreading is depreciation, and there are two standard ways to do it.
Straight line (prime cost)
The asset loses the same amount every year.
Diminishing value
The asset loses a fixed percentage of whatever value is left, so the amounts start large and shrink.
The carrying amount is the cost less all depreciation so far.
Side by side
A $12,000 piece of equipment with a 5 year effective life and no residual value. Straight line is $12,000 ÷ 5 = $2,400 a year. The diminishing value rate is 200% ÷ 5 = 40%.
| Year | Straight line | Diminishing value | DV carrying amount |
|---|---|---|---|
| 1 | $2,400 | $4,800 | $7,200 |
| 2 | $2,400 | $2,880 | $4,320 |
| 3 | $2,400 | $1,728 | $2,592 |
| 4 | $2,400 | $1,037 | $1,555 |
| 5 | $2,400 | $622 | $933 |
After two years, diminishing value has written off $7,680 against $4,800 for straight line. From year three, straight line gives the larger amount. Diminishing value never quite reaches zero; the remaining balance keeps reducing until the asset is sold or scrapped.
Which should you choose?
Diminishing value brings deductions forward. It suits assets that lose value quickly or become outdated, like vehicles and computers, and it helps cash flow in the years right after a purchase.
Straight line is simpler and gives the same expense each year, which makes budgets and profit reports easier to compare. It suits assets that wear evenly, such as furniture and fit-outs.
Either way you can never write off more than the asset cost. The choice changes the timing, not the total.
Things to know for tax
- For tax, you generally choose a method for each asset when you first claim, and stick with it for that asset.
- In the first year the ATO formulas pro-rate by the number of days you held the asset.
- Only the business-use share is deductible. A car used 70% for work gets 70% of the depreciation.
- Small businesses may have access to simplified depreciation rules. Ask your tax agent what applies this year, because the thresholds change.
Try it with your own numbers: open the depreciation calculator.