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Depreciation Formulas:
Prime Cost Method: \[ Depreciation = Cost \times Depreciation\ Rate \]
Diminishing Value Method: \[ Depreciation = Cost \times Depreciation\ Rate \]
Depreciation is the reduction in value of an asset over time due to wear and tear, obsolescence, or age. For tax purposes, the Australian Tax Office (ATO) allows businesses to claim depreciation as a tax deduction.
The ATO recognizes two main methods for calculating depreciation:
Prime Cost Method: \[ Depreciation = Cost \times Depreciation\ Rate \]
Diminishing Value Method: \[ Depreciation = Cost \times Depreciation\ Rate \]
Where:
Prime Cost: Spreads depreciation evenly over the asset's useful life. Each year's deduction is the same amount.
Diminishing Value: Provides larger deductions in early years that get smaller over time, reflecting that assets often lose more value in their early years.
Instructions: Enter the asset cost in dollars, the ATO depreciation rate (as a percentage), select the calculation method, and specify the number of years for the depreciation schedule.
Q1: Which method should I choose?
A: Prime cost gives consistent deductions, while diminishing value gives larger early deductions. Your choice depends on your tax strategy.
Q2: Where can I find ATO depreciation rates?
A: The ATO provides depreciation rates in their guide "Effective life of depreciating assets" (TR 2023/1).
Q3: Can I change methods later?
A: Generally no - you must continue with your chosen method for the asset's life unless special circumstances apply.
Q4: What about low-value pooling?
A: Assets under $1,000 may be eligible for immediate write-off or low-value pooling - consult the ATO guidelines.
Q5: Does this apply to all assets?
A: No - land and some other assets don't depreciate. Check ATO rules for your specific asset type.