Depreciation under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) is a recurring calculation for almost every business client a bookkeeper services. Getting it right — selecting the correct method, using the right effective life, and handling disposals properly — directly affects a client's taxable income year after year. This guide covers the core mechanics bookkeepers need to have across.
The Uniform Capital Allowances Framework
Division 40 establishes the Uniform Capital Allowances (UCA) framework, which replaced the former depreciation provisions and applies to depreciating assets generally. A depreciating asset is defined in s.40-30 as an asset that has a limited effective life and can reasonably be expected to decline in value over that life.
Not every business asset is a depreciating asset under Division 40. Land is not a depreciating asset — it does not have a limited effective life and does not decline in value (for these purposes). Trading stock is excluded. Goodwill and most other intangibles are not Division 40 assets — they are CGT assets, and a separate set of rules governs any relevant deductions. Financial instruments are not depreciating assets.
The practical consequence is that a bookkeeper must correctly classify each asset before applying Division 40. Capitalising a land purchase as a depreciating asset, or depreciating goodwill under Division 40, creates errors that the ATO will identify on a review of the asset register.
Prime Cost Versus Diminishing Value
Two depreciation methods are available under Division 40, and the choice is made asset by asset at the time the asset is first used or installed ready for use.
Prime cost (straight line): the annual deduction is calculated as a fixed percentage of the asset's original cost. The formula is: Cost × (Days held / 365) × (100% / Effective life in years). The deduction is the same in dollar terms each year the asset remains in use.
Diminishing value (reducing balance): the annual deduction is calculated as a percentage of the asset's adjustable value (cost less accumulated depreciation). The formula is: Opening adjustable value × (Days held / 365) × (200% / Effective life in years). Because the percentage is applied to a declining base, the deduction is largest in early years and reduces over time. The 200% multiplier means the diminishing value rate is always double the equivalent prime cost rate.
Once a method is selected for a particular asset, it cannot be changed. The choice is irrevocable, so bookkeepers advising clients on which method to use should consider the client's cash flow needs, current and projected marginal tax rate, and any SBE instant asset write-off thresholds that may apply in the year of acquisition.
Effective Life: ATO Determinations and Self-Assessment
The ATO publishes a table of effective lives for specific asset types in Taxation Ruling TR 2023/1 (updated annually). This ruling covers hundreds of asset categories across many industries and is the default reference for most business assets. Common examples: computers and laptops 4 years; office furniture 10 years; motor vehicles 8 years; commercial buildings plant and equipment items vary by component.
Taxpayers may self-assess a shorter effective life than the ATO's ruling if they can demonstrate that the asset will wear out faster in their specific use case — for example, machinery used in a highly abrasive environment may have a shorter practical life than the same machine used in a standard factory setting. The self-assessed life must be reasonable and supportable; the ATO can challenge an effective life that is artificially shortened without basis.
Some assets — primarily software — have specific effective life rules. In-house software developed or purchased has an effective life of 5 years under the ATO's determination for most types, though SBE entities may deduct software development costs more rapidly.
Low-Value Pools
Assets that cost less than $1,000 (the low-value asset threshold) can be allocated to a low-value pool under s.40-425, rather than being depreciated individually. The pool is depreciated at a flat 18.75% in the income year the asset is first allocated (regardless of when during the year it is acquired), and at 37.5% in each subsequent year on the pool's closing balance.
Once an asset is allocated to the low-value pool, it stays there — it cannot be removed and depreciated under the standard prime cost or diminishing value rules. Assets that started above the $1,000 threshold but whose adjustable value has since fallen below $1,000 can also be transferred to the low-value pool at that point (they become "low-cost" or "low adjustable value" assets respectively).
The pool simplifies bookkeeping for high-volume low-value assets — tools, minor equipment, small IT peripherals — that would otherwise require individual asset records.
Balancing Adjustment on Disposal
When a depreciating asset is sold, scrapped, lost, or otherwise disposed of, a balancing adjustment event occurs under s.40-295. This is not a CGT event — the balancing adjustment provisions in Division 40 apply instead of CGT for assets to which Division 40 applies.
The balancing adjustment is calculated as: Termination value minus Adjustable value at the time of disposal.
- If the termination value (sale proceeds, insurance payout, or market value) exceeds the adjustable value (written-down book value), the excess is an assessable balancing adjustment amount — it is included in assessable income.
- If the termination value is less than the adjustable value, the shortfall is a deductible balancing adjustment — it is deductible against assessable income.
This is commonly misunderstood. A bookkeeper who treats the sale of a depreciating asset as a capital gain or loss is applying the wrong provisions. The gain or loss on disposal of a Division 40 asset goes through the balancing adjustment, not the CGT provisions. Only assets that are not subject to Division 40 (land, certain intangibles, financial instruments) trigger CGT events on disposal.