Depreciation Basics:
Common Questions for Australian Businesses

Depreciation is the process of recognising that long-lived assets (equipment, vehicles, fit-out, computers etc.) lose value over time as they are used. Rather than recording the full cost of an asset as an expense in the year you buy it, depreciation spreads that cost across the years the asset is useful. It matters because it affects your tax bill, your profit figure, your balance sheet, and ultimately your ability to borrow money or sell the business. For accountants Depreciation under tax law and depreciation under accounting standards serve different purposes and will produce different figures. Both need to be calculated and maintained separately.

Tax depreciation is the deduction you claim on your tax return. It is calculated using rules set by the ATO and is designed to reduce your taxable income. Accounting depreciation is the charge in your financial statements that reflects the actual reduction in an asset's economic value over time. The two figures are calculated differently, governed by different rules, and should never be assumed to be the same number. For accountants Tax depreciation is a statutory deduction under Division 40, Division 43, or Division 328. Accounting depreciation is an accounting estimate governed by AASB 116. The differences between them creates temporary differences that must be recognised under AASB 112 as deferred tax assets or liabilities.

Yes, it matters a great deal! If your financial statements use tax depreciation figures instead of genuine accounting depreciation, they will not accurately reflect the value of your assets or your true profitability. This can mislead lenders, affect your ability to borrow, create problems in a business sale, and in some cases create regulatory compliance risks. For accountants Financial statements prepared on a tax depreciation basis are not compliant with AASB 116 or AASB 112. The deferred tax position will not be recognised, and the carrying amounts of assets will not represent economic reality. This is a professional risk for the preparer as well as an information risk for users.

Yes, if you own assets that are used in your business over more than one year. A fixed assets register is the record that supports your tax depreciation claim, your accounting depreciation schedule, your insurance values, and your balance sheet. Without it, you are relying on memory or incomplete records for calculations that have real financial consequences.

Generally, any asset with a cost above a materiality threshold and a useful life greater than one year. This includes plant and equipment, vehicles, computers and IT equipment, office furniture, tools, leasehold improvements, and certain intangible assets. Land is not depreciated but should appear in the register. Consumable items and low-value items below your capitalisation threshold do not need to be registered. For accountants The capitalisation threshold, the minimum cost at which an item is treated as a capital asset rather than an expense, is an accounting policy choice. Most SMEs set this between $300 and $1,000. Assets below the threshold are expensed immediately. The threshold should be documented and applied consistently.