The language of Australian depreciation.
Terms every business owner, accountant, bookkeeper and finance team should know, in plain language. Where a concept has technical depth, a separate note for accountants is included.
Last updated 4 April 2026
Accounting Depreciation
The amount by which an asset’s value is reduced in your financial statements each year, based on how long the business expects to use it. Buy equipment for $30,000 and expect ten years of use, and you would reduce its book value by about $3,000 a year. This charge flows through your profit and loss and reduces the asset’s value on the balance sheet.
Governed by AASB 116. The depreciable amount is cost less residual value, allocated over useful life using a method that reflects the pattern of consumption of economic benefits. Straight-line and diminishing value are the most common methods.
Accumulated Depreciation
The total depreciation charged against an asset since it was acquired. Buy an asset four years ago and charge $5,000 a year, and accumulated depreciation is $20,000. Subtract it from original cost to get the current book value.
A contra-asset account presented as a deduction from the gross carrying amount of the asset class. The net figure is the carrying amount or net book value.
Asset Register (Fixed Asset Register)
A record of every asset a business owns that is expected to last more than a year: what it is, when it was bought, what it cost, how it is depreciated and what it is worth on both a tax and accounting basis. It is the foundation of all depreciation work.
The source record for both the tax depreciation schedule and the accounting depreciation schedule. A single register serving both purposes requires tracking tax WDV and accounting WDV separately for each asset.
Balancing Adjustment
A tax calculation that happens when you sell, scrap or stop using a depreciating asset. It compares what you received against the asset’s written-down value for tax. Receive more than the WDV and the difference is assessable income; receive less and you may claim a deduction. The common surprise: an asset fully written off has a WDV of zero, so any proceeds are fully assessable.
Governed by Subdivision 40-D of the ITAA 1997. The event is triggered under section 40-295 (sale, loss, destruction, cessation of use). The assessable or deductible amount is calculated under section 40-285. Pool mechanics apply for SBE-pooled assets.
Book Value (Net Book Value / Carrying Amount)
What an asset is shown as being worth on the balance sheet at a point in time: original cost minus accumulated depreciation. This is an accounting figure and has no direct relationship to what the asset could be sold for or cost to replace.
Carrying amount (AASB 116) equals cost less accumulated depreciation less accumulated impairment losses. It will differ from tax WDV wherever depreciation policies diverge.
Capital Expenditure (CAPEX)
Money spent buying or improving long-term assets: plant, equipment, vehicles, buildings and fit-out. Unlike everyday operating costs, CAPEX is not deducted in full in the year it is spent; the cost is spread across the asset’s life through depreciation, unless a concession like the instant asset write-off allows an immediate deduction.
The capital versus revenue distinction is determined by common law principles. Misclassifying capital expenditure as an operating expense is a common audit risk. The correct treatment is to capitalise and depreciate, regardless of the tax treatment applied.
Capital Works Deduction
The tax deduction for constructing or improving a building or structure used to produce income. Unlike plant and equipment, capital works are written off at a fixed rate, generally 2.5% a year over 40 years. A buyer of an existing commercial property can claim on the original construction cost, provided that cost can be established.
Governed by Division 43 of the ITAA 1997. The rate is 4% where construction began after 21 August 1984 and before 16 September 1987, and 2.5% in most other cases, deductible over 25 and 40 years respectively. A 4% rate also applies to buildings used in the manner described in table 43-145, such as eligible industrial activities and short-term traveller accommodation. For acquired properties, original construction expenditure must be identified via vendor disclosure or a quantity surveyor report. Capital works deductions reduce the CGT cost base under section 110-45.
Carrying Amount
The value at which an asset sits on the balance sheet after deducting accumulated depreciation and impairment losses from its cost. It is the accounting term, and it will almost always differ from the tax written-down value wherever tax and accounting policies diverge.
Defined in AASB 116 as the amount recognised after deducting accumulated depreciation and impairment losses. Distinct from fair value, value in use, recoverable amount, and tax WDV, each relevant in different contexts.
Decline in Value
The statutory term used in Australian tax law for what is commonly called tax depreciation. It is the amount by which a depreciating asset’s value decreases in an income year for tax purposes, and it is this decline that produces the annual deduction.
The operative term in Division 40. Section 40-25 allows a deduction for the decline in value of a depreciating asset held to produce assessable income, calculated under the prime cost (40-75) or diminishing value (40-70) method.
Depreciating Asset
An asset with a limited useful life whose value is expected to decline as it is used: plant, equipment, vehicles, computers, tools and most physical business assets. Land is not a depreciating asset. Certain intangibles can be, if they have a finite effective life.
Defined in section 40-30 of the ITAA 1997. Excludes land, trading stock and certain financial instruments. Division 40 applies to most tangible income-producing assets; Division 43 applies to capital works.
Depreciation Schedule
A record of depreciation calculations for a business’s assets. In practice there are two: the tax depreciation schedule (supporting the income tax return) and the accounting depreciation schedule (supporting the financial statements). They almost always differ, and both need to be maintained. Treating them as one is a common error.
The tax schedule supports Division 40/43/328 deductions and must be retained under section 262A of the ITAA 1936. The accounting schedule is prepared under AASB 116. The two reconcile through the deferred tax calculation under AASB 112.
Diminishing Value Method
A method that applies a fixed percentage to the asset’s remaining written-down value each year, producing higher deductions early and lower deductions later. Under Division 40 the rate is 200% divided by the effective life (from 10 May 2006), so a 10-year asset depreciates at 20%.
Under section 40-70, the DV rate is 200% divided by effective life (150% before 10 May 2006). Chosen when the asset is first used or held ready for use and generally locked in for that asset.
Disposal
When a business gets rid of an asset by selling, scrapping, losing, gifting or simply ceasing to use it for business. A disposal triggers two calculations: an accounting entry and a tax balancing adjustment. Both need to be done, and a disposal is not limited to a formal sale.
Accounting derecognition under AASB 116 occurs on disposal or when no future benefits are expected. For tax, a balancing adjustment event under section 40-295 includes sale, loss, destruction and cessation of use; the two events may fall in different income years.
Division 40
The part of Australian tax law governing deductions for most depreciating assets: plant, equipment, vehicles, computers and similar. It sets the rules for effective life, method choice, disposals and balancing adjustments.
Division 40 of the ITAA 1997 (Uniform Capital Allowances) replaced prior rules from 1 July 2001. Key subdivisions: 40-B (core), 40-C (cost), 40-D (disposal), 40-E (low-value pools). Applies alongside Division 328 for eligible small businesses.
Division 43
The rules covering depreciation of capital works: buildings, structural improvements, extensions and fit-outs. It uses fixed write-off rates, generally 2.5% a year, applied to construction cost rather than the purchase price of an existing building.
Applies to capital works as defined in section 43-20. For second-hand properties, original construction expenditure must be identified via vendor disclosure or a quantity surveyor report. Interaction with CGT cost base applies under section 110-45.
Effective Life
How long an asset is expected to remain useful, as determined for tax. The ATO publishes effective lives for thousands of asset types (a laptop is 4 years). A business can self-assess a shorter life if it can show the asset will wear out faster in its circumstances.
Distinct from useful life under AASB 116. The ATO’s published life is a default that can be overridden by self-assessment under section 40-105, provided the shorter life is supportable if reviewed.
Instant Asset Write-Off
A concession letting eligible businesses deduct the full cost of an asset in the year it is bought, rather than over its life. The threshold is $20,000 per asset for businesses with aggregated turnover under $10 million. Both the threshold and the eligibility period are set by income year and have changed many times, so always confirm the limit for the income year the asset was first used.
Section 328-180 applies per asset. It creates an immediate temporary difference between tax WDV (zero) and accounting carrying amount, recognised as a deferred tax liability. Multiple assets each under the threshold can be written off in the same year.
Impairment
A reduction in an asset’s value below its carrying amount when it is no longer worth what the balance sheet says. Unlike depreciation (planned and systematic), impairment is unplanned, caused by damage, obsolescence or a market fall. It has no direct effect on tax depreciation.
Governed by AASB 136. An asset is impaired when carrying amount exceeds recoverable amount (the higher of fair value less costs of disposal and value in use). No effect on tax WDV, creating a further divergence to track.
Prime Cost Method
A method that deducts the same dollar amount each year: the asset’s cost divided by its effective life. Also called straight-line. A $20,000 asset with a 10-year life depreciates at $2,000 a year. Under Division 40 the rate is 100% divided by the effective life.
Under section 40-75, the deduction equals cost multiplied by (days held / 365) multiplied by (100% / effective life). Produces even deductions and is often preferred for accounting where it better reflects consistent consumption.
Pool (Small Business Pool)
A simplified way to track depreciation for small business assets. Instead of depreciating each asset separately, eligible assets are combined into one pool depreciated at 15% in the first year and 30% thereafter. Simpler compliance, but individual asset values are no longer tracked.
The general small business pool under section 328-190. Assets first used during the year are allocated at 15% of taxable purpose proportion; the opening balance depreciates at 30%. Individual WDVs cannot be derived from the pool balance alone.
Termination Value
The amount an asset is treated as being disposed of for, used in the balancing adjustment. Usually the sale price, but not always: for a gift, destruction or loss it may be market value, an insurance payout, or zero. Using the wrong figure produces the wrong tax outcome.
Defined in section 40-300. For a sale it is the consideration received; for a below-market disposal to an associate, market value; for loss or destruction, insurance or compensation received. Adjusted for the taxable purpose proportion.
Temporary Difference
The gap between an asset’s value for accounting and for tax, which eventually reverses and affects tax paid. The common case: tax depreciation is faster than accounting depreciation, so the asset has a lower tax WDV than accounting carrying amount. It reverses on sale or scrapping.
Defined in AASB 112 as the difference between carrying amount and tax base. Gives rise to deferred tax liabilities (taxable differences) or assets (deductible differences). For depreciating assets it equals accounting carrying amount minus tax WDV.
Written-Down Value (WDV)
The remaining value of an asset after depreciation has been deducted, showing how much of the original cost has not yet been claimed. Two versions matter: the tax WDV (for the return and balancing adjustments) and the accounting WDV or carrying amount (for the balance sheet). They differ whenever tax and accounting methods are not identical, which is almost always.
Tax WDV under Division 40 is cost less all prior deductions. For pooled assets under Division 328 only the aggregate pool balance is known. Tracking both figures per asset is essential for deferred tax and disposal planning.
Knowing the terms is half the work. The other half is a system that applies them correctly.
Dwindle maintains both the accounting view and the tax view at once. No rolling back, no asset ceiling, built for the whole team.