How to Calculate Depreciation for Your Australian Small Business (Step-by-Step)
Your accountant mentions "depreciation" every tax time, and you nod along. You know it's a deduction. You know it's about assets losing value. But if someone asked you to actually calculate it — could you?
Most small business owners can't. And that's fine — that's what accountants are for. But understanding how depreciation works means you can make better decisions about when to buy assets, which method to use, and how much your business is actually worth.
Here's the plain-English version.
What Is Depreciation?
Depreciation is the decline in value of a business asset over time. Your $2,000 laptop isn't worth $2,000 after a year of use — it's worth less. The ATO lets you claim that decline in value as a tax deduction.
Think of it as the business version of wear and tear.
What can be depreciated:
- Equipment, machinery, tools
- Computers, phones, tablets
- Furniture and fittings
- Vehicles
- Software (in some cases)
What can't be depreciated:
- Land (it doesn't wear out)
- Inventory / stock (that's a different deduction)
- Assets costing less than the instant write-off threshold (you deduct the whole thing immediately)
Step 1: Determine If You Can Claim Instantly
Before calculating depreciation, check if the asset qualifies for an immediate deduction.
Instant Asset Write-Off (Small Business)
If your business turnover is under $10 million and the asset costs less than the current threshold, you can deduct the entire cost in the year you buy it. No depreciation schedule needed.
Check the current threshold: The instant asset write-off threshold has changed multiple times. Check the ATO website for the current amount for 2025-26.
If your asset qualifies → claim the full amount → done.
If it doesn't qualify → continue to Step 2.
Step 2: Find the Asset's Effective Life
The ATO assigns an "effective life" to virtually every type of business asset. This is how long they expect the asset to be useful.
Common examples:
| Asset | ATO Effective Life |
|---|---|
| Laptop computer | 4 years |
| Office furniture | 10 years |
| Passenger vehicle | 8 years |
| Mobile phone | 3 years |
| Commercial oven | 10 years |
| Air conditioning | 10 years |
You can find the full list on the ATO's effective life tables.
Can you use your own estimate? Yes — if you believe the ATO's effective life doesn't reflect your situation, you can self-assess. But you need a reasonable basis for your estimate. Most small businesses stick with the ATO's numbers.
Step 3: Choose Your Depreciation Method
You have two options. Choose one per asset — you can't switch later.
Option A: Diminishing Value Method
Best for: Most small businesses. Gives you a bigger deduction in the early years.
How it works: You apply a percentage to the asset's remaining value each year. As the value decreases, so does the deduction.
Formula:
Deduction = Base Value × (Days Held ÷ 365) × (200% ÷ Effective Life)
Where:
- Base value = opening book value of the asset (purchase price in year 1)
- Days held = number of days you held the asset in that financial year
- Effective life = the ATO's figure
Option B: Prime Cost (Straight-Line) Method
Best for: Simplicity. Equal deductions each year.
How it works: You deduct the same amount every year over the asset's effective life.
Formula:
Deduction = Cost × (Days Held ÷ 365) × (100% ÷ Effective Life)
Step 4: Calculate Your Deduction
Let's work through both methods with the same asset.
The Asset
- What: MacBook Pro for business use
- Purchase price: $3,600
- Purchase date: 1 September 2025
- Effective life: 4 years
- Financial year end: 30 June 2026
- Days held in first year: 303 days (1 Sep to 30 Jun)
Diminishing Value Calculation
Year 1: $3,600 × (303 ÷ 365) × (200% ÷ 4) = $3,600 × 0.8301 × 0.50 = $1,494
Year 2 (full year): Remaining value: $3,600 - $1,494 = $2,106 $2,106 × (365 ÷ 365) × (200% ÷ 4) = $2,106 × 1 × 0.50 = $1,053
Year 3 (full year): Remaining value: $2,106 - $1,053 = $1,053 $1,053 × 0.50 = $527
Year 4: Remaining value: $527 $527 × 0.50 = $263
Year 5: Remaining: $263 → claimed in full = $263
| Year | Opening Value | Deduction | Closing Value |
|---|---|---|---|
| 2025-26 | $3,600 | $1,494 | $2,106 |
| 2026-27 | $2,106 | $1,053 | $1,053 |
| 2027-28 | $1,053 | $527 | $527 |
| 2028-29 | $527 | $263 | $263 |
| 2029-30 | $263 | $263 | $0 |
Prime Cost Calculation
Annual deduction: $3,600 × (100% ÷ 4) = $3,600 × 0.25 = $900 per year
Year 1 (partial): $900 × (303 ÷ 365) = $747
| Year | Deduction |
|---|---|
| 2025-26 | $747 |
| 2026-27 | $900 |
| 2027-28 | $900 |
| 2028-29 | $900 |
| 2029-30 | $153 (remaining) |
Which Gives You More?
Diminishing value gives you $1,494 in year 1 vs prime cost's $747. That's double the deduction up front. Over the full life, the total deduction is the same ($3,600) — it's just about timing.
Choose diminishing value if: You want the biggest deduction now (most small businesses). Choose prime cost if: You want predictable, equal deductions (simpler to forecast).
Step 5: The Small Business Pool (Alternative)
If tracking individual assets feels like too much, the small business pool simplifies things.
How it works:
- Assets that don't qualify for instant write-off go into one pool
- Year 1: Claim 15% of each asset's cost
- Every year after: Claim 30% of the pool's total closing balance
- When the pool balance drops below the instant write-off threshold, deduct the lot
Pros: One calculation instead of many. Simple. Cons: Less control. Can't optimise per asset.
Step 6: Keep Records
The ATO requires you to keep records of:
- What the asset is
- When you bought it and what you paid
- The effective life and method you're using
- Annual depreciation amounts claimed
- When and how you disposed of it
This is your asset register — and it's why one exists. You can use a free spreadsheet template or asset tracking software to maintain it.
Common Questions
What happens when I sell or dispose of an asset?
You need to calculate the "balancing adjustment." If you sell it for more than its current book value, you have assessable income. If you sell for less, you get an extra deduction.
What about assets used for both business and personal?
You can only claim the business-use portion. If you use your car 60% for business, you claim 60% of the depreciation.
What if I forgot to claim depreciation in previous years?
You may be able to amend previous returns. Talk to your accountant — there are time limits.
Does depreciation affect GST?
Depreciation itself doesn't involve GST. But when you buy the asset, you claim the GST credit separately (if you're GST-registered). Your depreciation calculation uses the GST-exclusive price.
Stop Calculating Manually
If you have more than a handful of assets, doing these calculations in a spreadsheet is tedious and error-prone. One wrong cell reference and your depreciation schedule is off for every subsequent year.
Asset Shark handles all of this automatically — enter the asset details once, and it calculates depreciation using the correct ATO method, adjusts for partial years, and generates the reports your accountant needs at EOFY.
This guide provides general information about depreciation in Australia. It's not tax advice. Always consult a registered tax agent for advice specific to your situation.