Depreciation is about spreading the cost of an asset over its useful life, reducing hefty upfront expenses and providing tax benefits for Australian businesses. The basic idea is to account for wear and tear or usage over time. By choosing the right depreciation method—like the prime cost or diminishing value method—you can better manage your cash flow and keep your finances healthy. Done correctly, it can be a powerful tool for boosting your tax efficiency.
Have you ever invested in critical equipment for your business and immediately felt the blow to your profits? It can feel like a financial avalanche, creating anxiety about how to juggle expenses and still maintain creative momentum. When you’re trying to run or grow a business in Australia, especially heading towards 2025, finding a way to temper those large asset investments is crucial. That’s precisely where knowing “what is depreciation?”—and using it strategically—comes in handy.
Below, we will unpack depreciation in a plain-talking so you can navigate these rules with a smile on your face (and a steadier bottom line in your banking app). Let’s dig into the key questions Australian creative professionals and businesses regularly ask about depreciation, and see how you can leverage these insights (and the Australian Taxation Office (ATO) guidance) for success.
Businesses often see depreciation as a purely accounting-driven notion, but it’s actually a powerful financial strategy. It ensures that the cost of long-term assets appears gradually on your financial statements. Here’s why it matters, especially in the Australian context:
• It helps businesses plan for the wear and tear of their assets.
• It manages impact on your profit and loss statement, preventing large one-off hits.
• It may qualify you for certain tax deductions each year.
Around 2025, understanding depreciation remains vital. Australian regulations evolve, but the basic principle is consistent: you spread out the cost of a depreciating asset according to its effective life. That ensures a fair representation of your business’s economic performance over time rather than one big expense at purchase.
Action Steps for 2025:
• Check whether you’re eligible for the ATO’s simplified depreciation rules if you run a small business (with aggregated turnover under $10 million).
• Map out your quarters; note when assets were purchased, placed in service, or retired for the year. Depreciation is calculated based on the time used, so accurate dates matter.
• Seek advice to see if any temporary incentives from prior years apply to your situation or if they’ve expired.
Below is a general illustration of the two main depreciation methods available to Australian businesses:
| Aspect | Prime Cost Method | Diminishing Value Method |
|---|---|---|
| Basic Concept | Deducts a fixed percentage of the asset’s original cost each year. | Deducts a percentage of the asset’s remaining value each year, leading to higher deductions in earlier years. |
| When to Use | If you prefer smooth, consistent yearly deductions or for intangible assets (required). | If you want more significant deductions earlier in an asset's life. |
| Impact on Cash Flow | Predictable. | Potentially more cash in hand sooner due to larger initial deductions. |
| Common Usage | Intangible assets (e.g., some intellectual property) and any tangible asset requiring a stable depreciation pattern. | Tangible assets where the business prefers an accelerated deduction approach. |
Small businesses in Australia often qualify for special or “simplified” rules, which can be a game-changer when you invest in vital gear for your operations. According to the ATO, if your aggregated turnover is less than $10 million from 1 July 2016 onwards, you may be eligible for simplified depreciation. For financial years up to 2023–24, the instant asset write-off threshold (for certain qualifying items) stands at $20,000. This is purely an example derived from the ATO’s updated guidance.
Under simplified depreciation:
• You can write off certain assets immediately if they’re under the applicable threshold.
• Other assets may be placed into a small business pool, allowing you to combine their values and depreciate them at rates set by the ATO.
Action Steps for 2025:
• Review the date and cost of all assets acquired before 30 June 2025—some might still be eligible for simplified depreciation if you satisfy thresholds.
• Don’t neglect the “lock-out rule,” which is suspended until 30 June 2024. After that date, keep an eye on potential re-entry requirements. This aspect affects how you continue or resume using simplified depreciation rules.
Below is a conceptual flowchart illustrating how the simplified depreciation process might work for eligible small businesses:
Absolutely. Although the mechanics differ slightly for intangible assets and buildings or structural improvements, the idea is still about allocating costs across an asset’s useful life:
• Intangible Assets: Under current ATO guidance, intangible assets like intellectual property, patents, or in-house software are often depreciable using the prime cost method. They must meet certain criteria to be treated as depreciable assets (not all intangibles qualify).
• Capital Works: This refers to deductions for construction costs, structural improvements, or extensions. These write-offs are generally spread over a specific time frame.
Action Steps for 2025:
• Keep meticulous records of intangible asset purchases. Because intangible assets must use the prime cost method, you’ll need the asset’s effective life and cost details.
• If you undertake a major building extension for a new art studio or music production facility, confirm whether it qualifies for capital works deductions.
In recent years, various temporary incentives allowed businesses to write off expenditures on assets faster. Many of these, including temporary full expensing and instant asset write-offs, helped businesses cushion the financial blows from the COVID-19 period. Some of these incentives ended by 30 June 2023, but rules can shift with new legislation. Stay alert to whether any provisions still apply to assets first used or installed ready for use before their respective cut-off dates.
Here are some highlights from the most recent guidelines:
• Temporary Full Expensing: Widely used between 2020–21 and 2021–22 fiscal years. Now mostly phased out.
• Instant Asset Write-off: The threshold changed over time; for the 2023–24 income year, certain assets under $20,000 might still be instantly deducted, subject to eligibility.
Action Steps for 2025:
• Ensure your records show when each asset was first used or installed. If you purchased something before 30 June 2023 but didn’t put it into service until after that date, you might not qualify for previously existing incentives.
• Don’t rely on outdated pandemic-era measures; speak to a chartered accountant (like the team at Amplify 11) to understand if any transitional rules apply.
Reading about depreciation might make you feel more equipped, but mistakes can be costly—they could lead to an audit or missed tax savings. A licensed accountant will guide you to choose the best method (prime cost vs. diminishing value, or simplified depreciation if eligible). They can also coordinate your overall tax strategy, ensuring you don’t miss out on special rules or inadvertently break any.
Enter Amplify 11. We are an Australian chartered accounting firm specialising in helping creative professionals and businesses. Our services ensure you can focus on producing astonishing creative work while our team handles the complexities of bookkeeping and taxes.
Action Steps for 2025:
• Don’t wait till the end of the financial year to consult a professional. Set up periodic check-ins to optimise your depreciation strategies.
• Keep your provider looped in on business expansions, new asset acquisitions, or major software developments so your depreciation schedule remains accurate.
No. Depreciation applies to both big and small businesses that purchase capital assets. Small businesses can often benefit more through simplified rules and potential instant write-offs.
Yes. If you operate as a sole trader and use business assets—like a laptop or camera—for income-producing activities, you can claim depreciation on the business-use portion. Always keep records of business vs. personal use.
Generally, once you choose a depreciation method for a particular asset, you must stick with it. Switches are rarely approved by the ATO and usually only under specific circumstances.
Not always. You must confirm the asset qualifies under the ATO’s guidelines. If it does, you are obliged to use prime cost. Some intangible assets (like certain trademarks) might not be depreciable at all.
To ensure your claims stand up in case of an audit by the ATO and to calculate your deductions accurately. You need to keep evidence of purchase costs, asset usage, and any relevant transaction details for at least five years.
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