Depreciation

Depreciation is the systematic reduction in the recorded value of a tangible asset over its useful life. It reflects wear and tear, obsolescence, or simply the passage of time, and is typically claimable as a tax deduction.

How depreciation works

Rather than expensing the full cost of a long-lived asset in the year of purchase, accountants and tax authorities require the cost to be spread across the asset’s useful life. Each year, a portion of the original cost is recognised as a depreciation expense.

Common depreciation methods

• Straight-line — equal expense each year (e.g., a $50,000 asset depreciated over 10 years = $5,000 per year)
• Diminishing value — larger expense in early years, smaller in later years; reflects faster early-life decline
• Units of production — expense based on actual usage (e.g., kilometres driven, hours operated)

Where depreciation matters

• Investment property — building structure and fixtures can typically be depreciated against rental income
• Business equipment — machinery, vehicles, and computers reduce taxable income through depreciation schedules
• Vehicles — personal vehicles lose value rapidly in their early years (often 15–25% in year one)

Tax versus accounting depreciation

The depreciation rate allowed for tax purposes does not always match the rate used for internal accounting. Always work with a qualified tax adviser to apply the correct schedules and rates for your jurisdiction and asset class.