How to Calculate Asset Depreciation in Australia walks through the two ATO decline-in-value methods, prime cost and diminishing value, with the exact formulas, a year-by-year worked example, and the surrounding rules (effective life, days held, the instant asset write-off, and pooling) that decide which numbers you are actually allowed to claim.
The two formulas
Prime cost (straight line) claims the same proportion of the asset's cost every year:
Diminishing value claims a percentage of the asset's remaining written-down (base) value, front-loading deductions. For assets acquired after 9 May 2006 the formula uses 200%:
(Assets acquired on or before that 2006 date use the older 150% formula.) Base value starts at cost and falls by each year's deduction, and the days-held factor apportions the first and last years: an asset bought on 1 April has only about a quarter of a year in its first claim.
Worked example
A 2,500 every year**, fully written off in exactly four years. Diminishing value: 200% / 4 = 50% of the base: year 1 claims **5,000), year 2 claims **2,500), year 3 claims 625, leaving a $625 base that continues declining in later years rather than finishing neatly at zero. Same asset, same total eventually claimed (ignoring disposals), different timing: diminishing value pulls deductions forward, which is worth real money when profits are strong now, while prime cost's flat profile suits businesses wanting predictable deductions matched to a loan term. The choice is made per asset and, once made, cannot be changed for that asset.
Effective life: where the years come from
Effective life is the ATO's estimate of how long the asset can be used for income production, published in the Commissioner's determination (the TR 2019/1 tables and their successors) for thousands of asset types, or self-assessed where you can justify a different figure (a harsher environment, a specific duty cycle). It is not the warranty period, the accounting life your software defaults to, or how long you feel like keeping the item, and using a self-assessed life materially shorter than the table figure is a standard audit question. Some assets are excluded from these formulas entirely (certain software, horticultural plants, and assets in pools follow their own rules), and second-hand assets acquired from an associate carry special cost rules.
The instant asset write-off and pooling
For eligible small businesses, the instant asset write-off lets the full cost of an asset under a legislated per-asset threshold be deducted in the year it is first used or installed ready for use, instead of depreciated. The threshold has changed repeatedly (it has sat at $20,000 in recent years after pandemic-era unlimited write-offs for larger businesses ended), it applies per asset rather than per invoice, and eligibility turns on aggregated turnover and the business's accounting method, so the current threshold and your eligibility must be confirmed for the specific year before relying on it. Simplified depreciation also offers a small-business pool: assets that are not written off go into the pool and decline at set pooled rates (15% in the first year, 30% thereafter on the pool balance), trading precision for a single calculation, with the pool itself potentially written off when its balance falls under the threshold at year end.
Decline in value is not accounting depreciation
The tax calculation in this guide (Division 40 decline in value) and the depreciation in your financial statements (accounting standards, your chosen useful lives and residual values) are separate systems that routinely produce different numbers for the same asset, reconciled in the tax return rather than forced to agree. Private use reduces the tax claim proportionally (an asset used 20% privately claims 80% of the computed decline), disposals trigger a balancing adjustment (sale proceeds above the written-down value are assessable; below it, the shortfall is deductible), and assets costing $300 or less used mainly for non-business income may be immediately deductible under a separate rule. None of these adjustments appear in the two formulas themselves, which is why the formulas are the start of the calculation, not the whole of it.
Frequently Asked Questions
Which method should I choose?
Diminishing value if earlier deductions are worth more to you (growing profits, higher current marginal rate, cash flow pressure); prime cost if you value even deductions or expect rising rates later. Model both over the asset's life at your actual tax rates; the formulas above make that a ten-minute exercise.
Can I switch methods later if my situation changes?
No. The method is chosen for each asset when you start to hold it and applies for its life. You choose again for each new asset, so a fleet bought over several years can legitimately mix methods asset by asset.
What happens when I sell or scrap the asset?
A balancing adjustment: compare the termination value (sale proceeds, insurance payout) with the adjustable value (written-down value). Proceeds above it are included in assessable income up to the total decline claimed; proceeds below it give a deduction for the difference. The formulas stop; the adjustment settles the account.