How to Do Depreciation: Australian Business Guide 2026

By Panbo Ye, CFP^®, FCPA, SMSF Specialist Advisor · Founder of Everglow · Updated 8 October 2026

You've bought the equipment, the invoice has landed, and the next question is immediate. Can you deduct it now, spread it over time, or are you about to claim it the wrong way and create a problem for yourself later? That's where depreciation stops being a bookkeeping label and becomes a real business decision.

For Australian businesses, investors, co-located practices, and new entrants to the market, knowing how to do depreciation means classifying the asset correctly, choosing the right method, apportioning private or shared use properly, and keeping records that would stand up if the Australian Taxation Office (ATO) asks questions.

How to Do Depreciation in Australia

Panbo Ye, CFP® | FCPA | SSA® | Founder, Everglow

Who this article is for: Australian business owners, medical professionals, property investors, and new migrant operators who need a practical way to calculate, record, and support depreciation claims.

The Foundations of Depreciation in Australia

Depreciation is how you recognise that a business or investment asset loses value for tax purposes over time. In practice, it's also how you avoid overstating profit in one year and understating deductible costs in later years.

The first distinction that matters is between Division 40 plant and equipment and Division 43 capital works. Plant and equipment generally covers depreciating assets such as appliances, fixtures, and business equipment. Capital works generally covers the building structure and fixed building elements. Division 43 carries a fixed 2.5% annual deduction over 40 years for eligible construction expenditure, which is separate from the variable effective life approach used for plant and equipment ATO guidance on capital works and plant distinction.

The low-cost rules matter early

Some assets don't need to be depreciated over many years. Under ATO rules, investors may claim an immediate deduction for depreciating assets costing $300 or less if the required tests are met, including that the asset is held for income-producing purposes and isn't part of a set costing more than $300. For assets above that threshold, the cost may go to a low-value pool if under $1,000, with that pool depreciated at 37.5% per annum, or the asset may be depreciated over its effective life ATO-aligned summary of immediate deduction and low-value pooling rules.

That's why a cheap office tool and a large diagnostic machine aren't just different in price. They're different in tax treatment from day one.

• Classify first: Decide whether the item is plant and equipment or capital works before touching the calculation.
• Check the threshold: A low-cost asset may be deductible immediately, but only if the tests are satisfied.
• Start a file early: Save invoices, delivery records, installation costs, and the date the asset was first used.

Practical rule: If the classification is wrong, the calculation will usually be wrong too.

Effective life is the engine of the calculation

For most assets, depreciation starts with the asset's effective life. That figure determines how quickly the deduction is spread. In rental property settings, the difference can be quite tangible. The same ATO-aligned guidance notes examples such as a dishwasher with a 10-year life and carpet with a 5-year life, while eligible residential construction expenditure can produce a fixed annual deduction. It also notes that records should be retained for five years to support compliance practical depreciation schedule overview.

Some owners leave depreciation until tax time and then try to reconstruct dates and costs from memory. That rarely works well. The records should begin when the asset is acquired, not when the return is due.

The key takeaway is simple. Depreciation isn't just a formula. It starts with asset classification, effective life, and records that match the asset's use.

Choosing Your Depreciation Method

For most depreciating assets, the general rules require you to use either the prime cost method or the diminishing value method, unless you're an eligible small business entity using simplified depreciation rules ATO general depreciation rules.

The choice changes timing. It doesn't change the need for discipline.

Prime cost or diminishing value

Prime cost is the steady option. It spreads deductions more evenly across the asset's effective life.

Diminishing value is front-loaded. It generally produces a larger deduction earlier and smaller deductions later, because the percentage is applied to a reducing base value.

Above all, pick a method that fits the commercial reality of the asset and your reporting objectives. If a business wants a smoother expense profile, prime cost can be easier to live with. If early-year deductions matter more, diminishing value may be more attractive, depending on the circumstances.

This comparison helps in practice.

Use this table to compare the two core methods before you calculate anything.

What works and what doesn't

What works is deciding the method once the asset's use, effective life, and ownership structure are clear. What doesn't work is choosing a method because it “sounds better” without considering whether the asset is partly private, shared between entities, or part of a building project.

The method is only one decision. The cost base, start date, and business-use percentage often matter just as much.

If you're dealing with property, it also helps to understand the difference between plant allowances and structural claims before selecting a method for any Division 40 item. This explanation of capital allowance versus capital works is useful when a fit-out includes both removable assets and structural elements.

• Choose for timing: Prime cost spreads. Diminishing value accelerates earlier deductions.
• Match method to evidence: Your usage records and effective life support the calculation.
• Avoid mixing concepts: Building structure and removable equipment usually sit under different rules.

The right depreciation method is the one that matches the asset, the timing objective, and the evidence you can support.

How Do I Calculate and Record Depreciation?

The practical answer is this. Identify the asset correctly, build the cost base properly, choose the method, apply any caps or apportionment rules, then record the decline in value in your accounts.

For Australian small businesses, one workable framework is to identify whether the item is Division 40 plant and equipment or Division 43 capital works, determine cost including incidental expenses such as transport and installation, choose prime cost or diminishing value, calculate the decline in value pro rata for days held, and then apportion by business-use percentage. The same guidance stresses keeping invoices, purchase contracts, first-use dates, workpapers, and evidence of business versus private use. It also notes that vehicle business-use estimates should be reviewed in each of the first three years of ownership practical six-step depreciation method.

Worked example for Tom in Brisbane

Tom is a tradie in Brisbane. He buys a passenger vehicle for work and assumes the full purchase price will drive the depreciation claim. That assumption can go wrong quickly.

For passenger vehicles, the ATO cost limit is $69,674 for FY 2025–26. If the car costs $90,000, only $69,674 is used in the depreciation calculation. If the vehicle has an 8-year effective life, the annual deduction under prime cost is capped at $8,709, calculated as $69,674 × (1 ÷ 8). Under diminishing value, the first-year deduction is $17,419, calculated as $69,674 × (200% ÷ 8). Claiming depreciation on the full purchase price rather than the capped figure is a common error vehicle depreciation cap explained.

If Tom also uses the vehicle privately, he can only claim the business-use portion. That apportionment needs to be backed by records, not guesswork.

Recording it in the books

The accounting entry is straightforward in concept. Tom records a depreciation expense in the profit and loss statement and a matching increase to accumulated depreciation in the balance sheet.

A simple journal entry format is:

• Debit: Depreciation expense
• Credit: Accumulated depreciation

For many owners, the harder part isn't the journal. It's building a support file that explains why the number is right. That's especially true where the asset sits inside a larger fit-out or property project. If construction and fit-out costs are mixed together, a quantity surveyor's breakdown can help separate structural items from plant and equipment. This guide to construction cost management is a useful primer on what a quantity surveyor does.

Good depreciation workpapers should let another accountant follow the trail without calling you for missing facts.

What to save for the ATO

When the records are weak, even a reasonable calculation becomes hard to defend.

• Save the invoice pack: Include supplier invoice, finance documents, registration costs if relevant, and delivery or installation records.
• Note the first-use date: The date first used or installed affects the calculation.
• Keep use evidence: Logbooks, rosters, booking systems, or usage records matter where private or shared use exists.

If you need to reflect depreciation properly in year-end accounts, this overview of financial statement preparation is a practical companion to the tax calculation.

How to do depreciation well is mostly about sequence. Get the cap, method, use percentage, and records right, and the bookkeeping becomes much easier.

Leveraging Small Business Concessions

If you run a qualifying small business, depreciation may be simpler than the general rules. That can reduce both admin and errors.

Small business entities with aggregated turnover of $10 million may use simplified depreciation rules. Under those rules, higher-cost assets can be pooled, with a 15% deduction in the first year of use and 30% annually thereafter ATO simplified depreciation rules for small business.

Why these concessions can help

The main advantage is simplification. Instead of separately tracking every eligible asset under the general rules, the business may use a pool for relevant assets and apply the pool rate.

That said, simplified rules don't remove judgment. You still need to decide whether the business is eligible, whether the asset belongs in the pool, and whether part of the use is private. Those issues still need attention.

• Check entity eligibility: The turnover threshold is the gateway issue.
• Understand first-year treatment: The first year doesn't use the same rate as later years.
• Watch the pool balance: The treatment of the remaining pool can change depending on the balance and the applicable write-off rules.

Where owners often slip

Some businesses assume “small business” automatically means every asset can be expensed immediately. It doesn't. The available treatment depends on the rules applying to the asset and the period involved.

Others miss the planning opportunity entirely. A business with several asset purchases across the year may benefit from deciding early whether the simplified rules are appropriate, rather than sorting it out after year-end. This guide to small business tax planning strategies is a sensible next read if you want the depreciation decision to sit inside a wider tax plan.

Small business concessions can simplify the mechanics, but they don't excuse weak records or poor asset classification.

If you qualify, simplified depreciation can make life easier. It still needs deliberate choices, not autopilot.

Guidance for Advanced and Niche Scenarios

The standard examples usually assume one owner, one asset, and one clear use case. Real life is messier.

Castle Medical GP partnership and shared assets

A co-located medical suite might share expensive equipment, reception technology, or fit-out assets across multiple entities. Existing guides rarely explain the practical allocation of decline in value where usage is shared, such as 40% Entity A, 30% Entity B, 30% common area, and the ATO has increased scrutiny on mixed-use and shared asset claims shared asset depreciation and mixed-use scrutiny.

For a partnership like Castle Medical GP partnership, what works is a usage methodology that can be evidenced. That may include booking logs, room rosters, service agreements, asset registers by entity, and a written basis for any common-area allocation. What doesn't work is applying a rough split at year-end because it “feels fair”.

A practical file for shared assets should include:

• Ownership evidence: Who bought the asset, who holds title, and who paid ongoing costs.
• Usage support: Booking data, consulting schedules, scan logs, or technician records.
• Allocation rationale: A short memo explaining how the percentages were determined and reviewed.

Wei and imported or pre-start assets

Wei, a new Sydney migrant professional, may have bought assets before starting business operations in Australia or imported them from overseas. That creates timing and cost-base questions that many generic guides skip.

The ATO notes that tangible assets under $100 may be immediately deductible and items under $1,000 can be pooled in the relevant context, but the timing of acquisition and first use still matters, particularly for new entrants handling imported assets or transition-period purchases ATO deductions for depreciating assets and capital expenses. For imported assets, I'd want the customs paperwork, supplier invoice, freight and installation records, and a clear note of when the asset was first used in the Australian income-producing activity.

Property investors face a related issue when separating structural building claims from removable items. If the asset base includes a rental property or mixed-use premises, this guide on how to claim depreciation on rental property helps frame the distinction before the numbers go into the return.

Complex depreciation usually turns on evidence and allocation. Shared use, imported assets, and mixed structures need a documented method, not a rough estimate.

Frequently Asked Questions About Depreciation

What happens when I sell a depreciated asset?
When you sell an asset, the prior depreciation claimed affects its tax position. The exact outcome depends on the asset type, the sale amount, and how it was treated over time. The safest approach is to compare the asset's written-down value to the sale proceeds and review the tax effect before lodging.

Can I claim depreciation on a second-hand asset?
It may be possible, depending on the asset, the taxpayer, and the applicable rules. The key is to establish cost, date of acquisition, date first used for income-producing purposes, and the correct classification. A second-hand item still needs the same level of supporting records as a new one.

How do I correct a depreciation mistake from a previous year?
Start by identifying whether the error sits in classification, effective life, business-use percentage, or arithmetic. Then review whether an amendment, adjustment, or revised workpaper is needed for the affected year. Don't change the current year number and hope it evens out.

Do I need a quantity surveyor for commercial property?
Not every property claim needs one, but many do benefit from a proper cost breakdown, especially where capital works and plant are mixed together. If you're trying to understand how building components are separated for tax purposes, this guide to real estate cost segregation gives useful background, even though Australian claims still need to follow local rules.

How long should I keep depreciation records?
You should keep records long enough to support the claim and any later review. The ATO-aligned guidance cited earlier notes a five-year retention period for relevant records. In practice, I'd keep a complete file for as long as the asset remains relevant to the return history and disposal outcome.

Can I work out depreciation myself?
For a straightforward asset with clear business use, yes, sometimes you can. For shared assets, vehicles with private use, imported assets, property fit-outs, or anything involving multiple entities, errors tend to become expensive. The calculation is only part of the job. The supporting file is just as important.

If you would like clarity on how these principles may apply to your own circumstances, contact Everglow Prosperity on 1300 913 929 or email contact@everglow.au.

To book directly: Book a meeting with Panbo.