Governed by AASB 116 Property, Plant and Equipment. 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 is a contra-asset account presented as a deduction from the gross carrying amount of the asset class on the balance sheet. The net figure is the carrying amount or net book value.

Under AASB 116, subsequent expenditure is recognised as part of the carrying amount of the asset only when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. Expenditure that merely maintains the asset's existing service potential is expensed.

For tax purposes, an improvement that extends the asset's effective life or increases its capacity may be capitalised and depreciated under Division 40, though the ATO's distinction between capital improvements and deductible repairs requires case-by-case assessment against the principles established in case law. An addition that is separately identifiable with a different effective life should be treated as a separate depreciating asset in the register.

Aggregated turnover is defined in section 328-115 of the ITAA 1997. It includes the annual turnover of the entity itself plus the annual turnover of any connected entities (section 328-120) and affiliates (section 328-125).

An entity is connected with another if either controls the other, or both are controlled by the same third entity, control being defined as a direct or indirect interest of 40% or more.

An affiliate is an individual or company that acts or could reasonably be expected to act in accordance with the taxpayer's directions or wishes. Aggregated turnover must be assessed at the time the relevant concession is claimed, not just at the start of the income year.

A business that crosses the $10 million threshold partway through a year may lose SBE status mid-year for the purpose of some concessions. Advisors should reassess SBE eligibility annually and document the basis of the conclusion.

The asset register is the source record for both the tax depreciation schedule (feeding the income tax return) and the accounting depreciation schedule (feeding the financial statements). Maintaining a single register that serves both purposes requires tracking the tax WDV and accounting WDV separately for each asset.

Governed by Subdivision 40-D of the ITAA 1997. The balancing adjustment event is triggered by events listed in section 40-295, including sale, loss, destruction, or cessation of use. The assessable or deductible amount is calculated under section 40-285. For assets in the SBE pool, pool mechanics apply rather than individual asset calculations.

Balancing adjustment events are listed in section 40-295 of the ITAA 1997 and include: disposal of the asset, the asset being lost or destroyed, the asset ceasing to exist, cessation of the asset's income-producing use, and certain other events. The timing of the event determines the income year in which the balancing adjustment is included in assessable income or allowed as a deduction. Where an event occurs partway through a year, the decline in value for that year is calculated only up to the date of the event under section 40-285(2). For assets subject to a hire purchase arrangement or lease, the balancing adjustment event rules differ from those for outright ownership.

The carrying amount (AASB 116 terminology) equals cost less accumulated depreciation less accumulated impairment losses. Fair value, recoverable amount, and replacement cost are distinct concepts. The carrying amount for accounting purposes will differ from the tax WDV wherever depreciation policies diverge.

The distinction between capital expenditure and revenue expenditure is determined by common law principles. Misclassification of capital expenditure as an operating expense is a common audit risk. The correct accounting treatment is to capitalise and depreciate, regardless of the tax treatment applied.

The capital works deduction is governed by Division 43 of the ITAA 1997. It applies to the construction expenditure incurred on qualifying capital works — buildings, extensions, alterations, and structural improvements — as defined in section 43-20. The write-off rate is 2.5% (construction after 26 February 1992) or 4% (construction between 22 August 1979 and 26 February 1992). The deduction begins from the time the capital works are first used or held ready for use. For acquired properties, the original construction expenditure must be identified — via vendor disclosure or a quantity surveyor report — as the deduction is based on the construction cost, not the acquisition price. Capital works deductions reduce the CGT cost base of the property under section 110-45, which is a critical interaction when the property is sold.

The car depreciation limit under section 40-230 applies to cars as defined in section 995-1 — passenger vehicles designed to carry fewer than 9 passengers. It does not apply to commercial vehicles, motorcycles, or vehicles modified for commercial use. The GST treatment of the cost above the limit also differs and requires separate consideration. Confirm the current limit with the ATO each year as it is indexed annually.

Carrying amount is defined in AASB 116 as the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. It is the net figure presented on the face of the balance sheet or disclosed in the notes. The gross carrying amount (before deducting accumulated depreciation) must also be disclosed. The carrying amount differs from: fair value (what the asset could be sold for), value in use (the present value of future cash flows from the asset), recoverable amount (the higher of fair value less costs of disposal and value in use), and tax WDV (the remaining cost for tax depreciation purposes). Each of these measures is relevant in different accounting or tax contexts.

Closing adjustable value is defined in section 40-85 of the ITAA 1997 as the opening adjustable value less the decline in value for the income year (the depreciation deduction). Where a balancing adjustment event occurs during the year, the closing adjustable value is calculated up to the date of the event rather than the end of the income year. The closing adjustable value should be reconciled to the tax depreciation schedule at year end and carried forward as the opening adjustable value for the subsequent year. It must be maintained on a per-asset basis — for assets in the SBE pool, only the aggregate pool balance is tracked, and individual closing adjustable values cannot be determined without a shadow register.

Component accounting is required under AASB 116 paragraph 43, which states that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The threshold for significance is a matter of judgment. In practice, component accounting is most commonly applied to buildings, aircraft, ships, and complex plant. For tax purposes, there is no equivalent requirement — Division 40 applies to the asset as a whole, or to separately identified assets where parts are acquired separately. A partial disposal under AASB 116 requires derecognition of the specific component disposed of at its carrying amount, which is only possible if component accounting has been applied from the outset.

For depreciating assets under Division 40, the relevant concept is 'cost' as defined in section 40-180, which includes the acquisition price and certain incidental costs. For CGT assets, cost base is defined separately under Division 110. Most business assets used solely for income-producing purposes are depreciating assets under Division 40.

Decline in value is the operative term in Division 40 of the ITAA 1997. Section 40-25 allows a deduction for the decline in value of a depreciating asset held for the purpose of producing assessable income. The decline in value is calculated under either the prime cost method (section 40-75) or the diminishing value method (section 40-70). The choice of method is made when the asset is first used or held ready for use and is generally locked in for that asset. The term depreciation is used loosely in practice and in accounting standards but does not appear in the operative provisions of Division 40 — advisors should use decline in value when working with the legislation and ATO correspondence to avoid ambiguity.

Deferred tax assets are recognised under AASB 112 Income Taxes to the extent it is probable that future taxable profit will be available against which the deductible temporary difference can be utilised. For depreciation, a deferred tax asset arises when the accounting carrying amount of an asset is less than its tax WDV — meaning more tax depreciation has been claimed than accounting depreciation charged. This is the reverse of the more common situation. A deferred tax asset also arises from tax losses carried forward, provisions not yet deductible for tax, and other timing differences unrelated to depreciation. The recognition test — probable future taxable profit — requires judgment and should be reviewed at each reporting date.

Deferred tax liabilities arising from accelerated tax depreciation are a classic temporary difference under AASB 112 Income Taxes. The liability is recognised at the tax rate expected to apply when the temporary difference reverses. For most SMEs applying the instant asset write-off, the DTL reverses over the accounting useful life of the asset or on disposal, whichever comes first.

Defined in section 40-30 of the ITAA 1997. The definition excludes land, trading stock, and certain financial instruments. Division 40 applies to most tangible assets used for income-producing purposes. Division 43 applies to capital works (buildings and structural improvements), which have their own write-off rates.

Depreciation in financial reporting (AASB 116) and in taxation (Division 40) are governed by different frameworks and will generally produce different results. The tax deduction should never be automatically replicated in the financial statements. The divergence creates temporary differences that must be recognised under AASB 112.

The tax depreciation schedule is a supporting worksheet for the income tax return, underpinning the deductions claimed under Division 40, Division 43, or Division 328. It must be retained as part of the taxpayer's records under section 262A of the ITAA 1936 for five years from the date of lodgement. The accounting depreciation schedule is the source document for the depreciation charge in the profit and loss account and the carrying amounts on the balance sheet, prepared in accordance with AASB 116. The two schedules reconcile through the deferred tax calculation under AASB 112, the temporary differences between accounting carrying amounts and tax WDVs produce deferred tax assets or liabilities that must be recognised in the financial statements. A depreciation platform that maintains both schedules simultaneously eliminates the risk of the two falling out of step and ensures the deferred tax position can be calculated accurately at year end.

Under section 40-70, the DV rate is 200% divided by effective life (from 10 May 2006 onwards, or 150% before this date). The method must be chosen when the asset is first used or held ready for use and is generally locked in for that asset. The diminishing value method under accounting standards may use a different rate to the tax rate if useful life differs from effective life.

For accounting purposes, derecognition of an asset under AASB 116 occurs when the asset is disposed of or when no future economic benefits are expected from its use or disposal. The gain or loss is the difference between net disposal proceeds and the carrying amount.

For tax purposes, a balancing adjustment event under section 40-295 includes sale, loss, destruction, cessation of income-producing use, and certain other events. The tax termination value (section 40-300) is the consideration received, or market value if disposed of at below-market value in certain circumstances. The two events may not occur in the same income year — for example, an asset may cease to be used for business purposes (triggering the tax event) before it is formally sold.

Subdivision 328-D sets out the simplified depreciation rules. Once elected, a business generally cannot exit the simplified rules for five years without ATO approval under the lock-in rule (section 328-175). This lock-in is an important planning consideration. The pool balance — not individual asset WDVs — is the operative figure for tax purposes once assets are pooled.

Division 40 of the ITAA 1997 (Uniform Capital Allowances system) replaced previous depreciation rules from 1 July 2001. Key subdivisions include 40-B (core rules), 40-C (cost), 40-D (disposal), and 40-E (low-value pools). Division 40 applies alongside — not instead of — the SBE simplified depreciation rules in Division 328 for eligible small businesses.

Division 43 applies to capital works as defined in section 43-20. For properties acquired secondhand, the original construction expenditure must be identified via vendor disclosure or a quantity surveyor report. The write-off is available regardless of whether the taxpayer incurred the original construction cost. Interaction with CGT cost base adjustments applies under section 110-45.

Effective life under Division 40 is distinct from useful life under AASB 116. The ATO's published effective life is a default that taxpayers can override by self-assessment under section 40-105 if they can demonstrate a shorter life in their specific use. Self-assessed lives must be supportable if reviewed by the ATO.

Fixed assets are formally referred to as property, plant and equipment (PP&E) under AASB 116, which defines them as tangible items held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and expected to be used during more than one period. The distinction between fixed assets (capital expenditure) and current assets (stock, receivables, cash) is fundamental to balance sheet presentation. For tax purposes, the equivalent concept is a depreciating asset under section 40-30 of the ITAA 1997, though the scope differs: some intangible assets are depreciating assets for tax but would not be classified as fixed assets for accounting purposes, and land is a fixed asset for accounting but explicitly excluded from Division 40. The fixed asset register is the source document for both the accounting and tax treatment of PP&E and should maintain both the accounting carrying amount and the tax WDV for each asset on a per-asset basis.

Immediate deductions for depreciating assets arise under several provisions: section 328-180 (instant asset write-off for SBEs), Subdivisions 40-BB and 40-BC (temporary full expensing, now ended), and various other specific provisions for particular expenditure types. An immediate deduction is a timing concession, not an exemption — the amount deducted upfront will eventually be recouped through the balancing adjustment system on disposal. For accounting purposes, an immediate deduction has no effect — the asset continues to be capitalised and depreciated over its accounting useful life. The full deduction in the tax return creates an immediate and complete temporary difference between the tax WDV (zero) and the accounting carrying amount (cost less one year of accounting depreciation), which must be recognised as a deferred tax liability.

Impairment of PP&E is governed by AASB 136 Impairment of Assets. An asset is impaired when its carrying amount exceeds its recoverable amount, where recoverable amount is the higher of fair value less costs of disposal and value in use. An impairment review is triggered by indicators of impairment such as significant decline in market value, adverse changes in the technological or market environment, evidence of physical damage, or plans to discontinue or restructure the asset's use. Impairment losses are recognised in profit or loss unless the asset is carried at revalued amount, in which case the impairment reverses the revaluation surplus first. Impairment has no effect on the asset's tax WDV — Division 40 depreciation continues on the original cost regardless of accounting impairment, creating an additional divergence between accounting carrying amount and tax WDV that must be tracked in the asset register.

The write-off under section 328-180 applies per asset. It creates an immediate temporary difference between tax WDV (zero) and accounting carrying amount (cost less accounting depreciation). This difference must be tracked and recognised as a deferred tax liability. Multiple assets each under the threshold can all be written off in the same income year.

The lock-in rule is contained in section 328-175 of the ITAA 1997. A small business entity that has chosen to use the simplified depreciation rules for an income year must continue to use them for that and all subsequent income years until it either ceases to be a small business entity or applies to the Commissioner to leave the regime. The ATO may allow early exit in limited circumstances. The lock-in rule has practical implications for businesses approaching the $10 million aggregated turnover threshold — if they anticipate exceeding the threshold and losing SBE status, the transition out of the simplified rules requires careful planning, particularly around the treatment of the pool balance, which must be brought into the Division 40 system.

The low pool value write-off is provided under section 328-210 of the ITAA 1997. The threshold has been subject to significant variation: it was temporarily set at the same level as the instant asset write-off threshold during the period of temporary full expensing and related measures, meaning many businesses were able to write off their entire pool balance in those years. The low pool value write-off is available only where the business has chosen to use the simplified depreciation rules — it is not available to businesses using the standard Division 40 low value pool under Subdivision 40-E. Where the pool balance is written off under this provision, a shadow register must still be maintained for accounting purposes, as the accounting carrying amounts of the individual assets are unaffected by the tax write-off.

Under section 40-425(2), a depreciating asset can be allocated to the low value pool in the income year it is first used or held ready for use if its cost (reduced by the taxable purpose proportion) is less than $1,000. In the year of allocation, the pool rate is 18.75% (the half-year convention under section 40-435(2)), regardless of when during the year the asset was acquired. In subsequent years, the standard pool rate of 37.5% applies to the pool balance. Once allocated to the low value pool, the asset cannot be removed. The low value pool and the SBE general small business pool are mutually exclusive. An entity using Division 328 cannot also maintain a low value pool.

Under section 328-180, a low-cost asset for an SBE is one whose cost is less than the relevant threshold for the income year. The asset is deducted in full in the year it is first used or held ready for use. The write-off is not available for assets excluded from the simplified depreciation rules (for example, certain assets leased to other parties or used in a primary production business where alternative rules apply). The write-off creates an immediate temporary difference between the tax WDV (zero) and the accounting carrying amount (cost less accounting depreciation), which must be tracked for deferred tax purposes and managed carefully on disposal as the full termination value becomes assessable income.

Under section 40-425(1), an asset can be allocated to the low value pool at the start of an income year if its opening tax WDV (after applying the taxable purpose proportion) is less than $1,000. The asset's WDV as at the start of the income year becomes the amount allocated to the pool — the pool balance then increases by that amount and the individual asset schedule is closed. The pool rate of 37.5% (or 18.75% in the first year of pool allocation if the asset was first used in that year) applies to the combined pool balance including any newly allocated assets. The distinction between low-cost assets (allocated in year of acquisition) and low-value assets (allocated once WDV falls below $1,000 in a later year) matters for calculating the pool balance correctly: low-cost assets attract the 18.75% first-year rate, while low-value assets allocated from an existing schedule attract the full 37.5% from the start of the year of transfer.

Businesses using Division 328 simplified depreciation cannot also access the low value pool under Subdivision 40-E, the two regimes are mutually exclusive. The low pool value threshold under section 328-210 (which allows the entire pool balance to be written off when it falls below a set amount) is a separate concept and should not be conflated with the non-SBE low-value asset rules. Advisors should take care when a client transitions from SBE to non-SBE status: assets previously pooled under Division 328 will need to be brought into the Division 40 system, and the opening balances require careful reconstruction. At that point, the low value pool under Subdivision 40-E becomes available for assets meeting the relevant criteria.

Maintenance capital expenditure is not a defined accounting or tax term but is widely used in financial analysis and valuation. It is a key component of free cash flow calculations: Free Cash Flow = EBITDA less tax less changes in working capital less maintenance capex. Growth capex is excluded because it represents discretionary investment rather than the cost of sustaining the existing business. In valuation contexts (DCF, EBITDA multiples), the distinction between maintenance and growth capex affects both the numerator (normalised earnings) and denominator (implied capex requirements) of the valuation. Where accounting depreciation has been distorted by tax policies, maintenance capex must be estimated independently — typically by reference to the asset register, replacement cost schedules, and the business's capital replacement history.

Net assets is the residual interest in the assets of the entity after deducting all of its liabilities, as defined in the Australian Conceptual Framework and AASB 101 Presentation of Financial Statements. It equals total equity and is presented as the bottom line of the balance sheet. For regulatory purposes, different regimes use different measures: the QBCC uses NTA (net tangible assets, which excludes intangibles); ASIC's AFSL requirements use net tangible assets calculated under the relevant financial requirements; the Corporations Act solvency test uses the ability to pay debts as they fall due (a cash flow rather than balance sheet test). Advisors should confirm which specific definition applies before assessing a client's compliance position under any particular regulatory regime.

NPV in the context of depreciation timing decisions is calculated by discounting the tax saving from each year's depreciation deduction back to the present using the business's after-tax cost of capital or hurdle rate. For a corporate taxpayer at 25%, an immediate deduction of $20,000 produces a tax saving of $5,000 today. Standard depreciation over five years produces the same total tax saving of $5,000 but spread across five years — at a 7% discount rate, the present value of those five annual savings is approximately $4,100. The NPV advantage of the immediate deduction is therefore approximately $900 on a $20,000 asset. For larger assets (as were common under temporary full expensing), this NPV advantage compounds significantly. The NPV framework also applies to the disposal balancing adjustment — the tax cost on disposal, discounted back to the present, must be weighed against the upfront timing benefit.

NTA is calculated as total assets less intangible assets (goodwill, IP, licences) less total liabilities. For QBCC Minimum Financial Requirements, the QBCC's own definition applies and excludes certain related party balances and other items regardless of how they appear in the accounts. Advisors must use the specific regulatory definition rather than a generic accounting definition.

Opening adjustable value is defined in section 40-85 of the ITAA 1997 as the cost of the asset reduced by any prior year deductions, including any deductions for decline in value, balancing adjustments, or other reductions to the asset's cost. It is the figure to which the diminishing value rate is applied under section 40-70, or from which the prime cost deduction is calculated under section 40-75. For assets in their first year of use, the opening adjustable value equals the cost (subject to any first-year adjustments for partial year use under the days-held formula). Advisors should take care to distinguish the opening adjustable value (tax concept) from the opening accounting carrying amount (accounting concept) — they will differ wherever tax and accounting depreciation policies diverge.

AASB 116 requires that each significant component of an asset with a different useful life be depreciated separately (component accounting). A partial disposal involves derecognising the component disposed of at its carrying amount and recognising any gain or loss. Where component accounting has not been applied, an estimate of the relative cost and accumulated depreciation of the disposed portion must be made.

For tax purposes, a partial disposal may trigger a balancing adjustment event under section 40-295 to the extent of the portion disposed of. The taxable purpose proportion must also be reconsidered for the retained portion if the nature of its use changes.

The low value pool is available under Subdivision 40-E of the ITAA 1997, specifically sections 40-425 to 40-445. It is distinct from the general small business pool under Division 328 — the two are mutually exclusive for a given entity. The pool rate is 18.75% in the year an asset is first allocated (a half-year convention regardless of acquisition date) and 37.5% in subsequent years. Once an asset is allocated to the low value pool it cannot be removed. On disposal, the termination value is deducted from the pool balance; if the balance goes negative, the excess is assessable income.

The general small business pool under section 328-190 aggregates eligible assets. Assets first used or held ready for use during the income year are allocated at 15% of their taxable purpose proportion. The opening pool balance for subsequent years is depreciated at 30%. Individual asset WDVs cannot be determined from the pool balance alone — a separate calculation is needed for accounting, insurance, and planning purposes.

The in-house software pool is governed by Subdivision 40-E, sections 40-450 to 40-455 of the ITAA 1997. Expenditure on developing in-house software is allocated to the pool in the year incurred. The pool is depreciated at the rates listed above, depending on when the expenditure was incurred. If the software is abandoned before it is used, a balancing adjustment arises. Software acquired under licence (rather than developed in-house) is generally depreciated under Division 40 using an effective life determined by the nature and terms of the licence. The interaction between the software pool and R&D tax incentive claims requires careful analysis where both may apply.

Under section 40-75, the prime cost deduction equals the asset's cost multiplied by (days held divided by 365) multiplied by (100% divided by effective life). Prime cost produces predictable, even deductions and is often preferred for accounting purposes where it better reflects a consistent pattern of economic benefit consumption.

Profit or loss on disposal under AASB 116 is calculated as proceeds received less the carrying amount of the asset at the date of disposal. The carrying amount is cost less accumulated depreciation less any accumulated impairment losses. The gain or loss is recognised in profit or loss and is not classified as revenue. It should not be confused with the tax balancing adjustment under section 40-285, which uses the tax WDV rather than the accounting carrying amount and may produce a materially different figure — particularly where tax and accounting depreciation policies have diverged over the asset's life.

PP&E is governed by AASB 116, which defines it as tangible items held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and expected to be used during more than one period. The standard requires disclosure of gross carrying amounts, accumulated depreciation, and net carrying amounts by class of asset, along with reconciliations of opening and closing balances. For tax purposes, the equivalent category is depreciating assets under Division 40, though the scope differs — intangible assets with finite lives may be depreciating assets for tax but are not PP&E for accounting purposes, and land is PP&E but not a depreciating asset. The fixed asset register should maintain both the PP&E accounting balances and the Division 40 tax balances for each asset.

The ATO accepts quantity surveyor reports as a basis for establishing construction expenditure under Division 43 where the original records are unavailable, as outlined in Tax Ruling TR 97/25. The quantity surveyor must be a member of a recognised professional body such as the Australian Institute of Quantity Surveyors. The report should separately identify: the Division 43 construction expenditure (the structural elements at the relevant write-off rate), the Division 40 plant and equipment (depreciating assets embedded in the property, depreciated under Division 40 at their respective effective lives), and the land value (not depreciable). The cost of the quantity surveyor report itself is generally deductible as a cost of managing tax affairs. Quantity surveyor reports are particularly important for property investors seeking to maximise deductions on acquired investment properties.

Replacement cost is distinct from fair value, net realisable value, and value in use. For insurance purposes it is the most relevant measure for most plant and equipment, though indemnity value (current market value accounting for age and condition) may be more appropriate for assets with active secondhand markets. Neither is the same as accounting carrying amount or tax WDV.

Replacement value is not a defined term under AASB 116 or other Australian accounting standards, but is used in insurance valuation and in certain impairment analyses. For insurance purposes, replacement value typically means the cost of reinstating the asset to its pre-loss condition using the nearest equivalent available in the current market — which may differ from a strict like-for-like replacement if the original asset is no longer manufactured. For impairment testing under AASB 136, the relevant measures are recoverable amount (the higher of fair value less costs of disposal and value in use) rather than replacement value. Where a business uses replacement value as the basis for its insurance schedule, it should be updated at least annually to reflect current market prices, supply chain conditions, and any changes in the asset base.

Residual value under AASB 116 must be reviewed at each annual reporting date and adjusted if expectations change. A residual value of zero is acceptable and common. Under Division 40, there is no equivalent concept — the full cost of the asset is depreciated and depreciation continues until WDV reaches zero, the asset is disposed of, or a balancing adjustment event occurs.

The revaluation model under AASB 116 requires that when one asset in a class is revalued, the entire class must be revalued. Revaluations must be carried out with sufficient regularity to ensure the carrying amount does not differ materially from fair value. Upward revaluations are credited to other comprehensive income and accumulated in the revaluation reserve in equity. Downward revaluations are recognised in profit or loss, except to the extent they reverse a previous revaluation reserve.

Revaluation generally does not affect the tax cost base of the asset — Division 40 continues to apply to the original cost. This creates a permanent difference (not a temporary difference) between accounting and tax values for revalued assets, as the revalued portion will never give rise to a tax deduction or assessable amount.

Scrapping triggers a balancing adjustment event under section 40-295 of the ITAA 1997, specifically the cessation of the asset's existence or its disposal. The termination value on scrapping is generally zero (no consideration received), resulting in a deductible balancing adjustment equal to the asset's tax WDV at the time of scrapping under section 40-285. Where an asset is partly demolished or scrapped (for example, a building component that is removed during renovation), the deduction relates only to the portion scrapped. For accounting purposes, the asset (or component, if component accounting has been applied) is derecognised at its carrying amount and the net amount — proceeds (nil) less carrying amount — is recognised as a loss on disposal in profit or loss. Advisors should ensure scrapping events are recorded promptly in the asset register to avoid continuing to claim depreciation on an asset that no longer exists.

Second element costs are defined in section 40-190 of the ITAA 1997. They include amounts incurred after acquisition that are capital in nature and relate to the asset — such as improvements, modifications, and certain installation or commissioning costs incurred after the asset is first used. The second element cost is added to the asset's Division 40 cost and depreciated using the same method (prime cost or diminishing value) as the original asset, but from the time the expenditure is incurred. Where the improvement has a materially different effective life to the original asset, the ATO may accept or require it to be treated as a separate depreciating asset with its own cost and effective life rather than being added as a second element cost.

SBE status is determined under section 328-110. Aggregated turnover includes connected entities and affiliates under sections 328-120 and 328-125. Businesses should confirm SBE status each income year as eligibility can change. Using simplified depreciation rules without confirming SBE eligibility is a common compliance risk.

Start time is defined in section 40-60 of the ITAA 1997. The asset begins to decline in value at the earlier of: the time the asset is first used for any purpose, or the time it is first held ready for use for a taxable purpose. The start time determines the income year in which the first depreciation deduction is available and triggers the application of the days-held formula under the prime cost method for the first year. For the instant asset write-off under Division 328, the asset must be first used or installed ready for use within the relevant income year for the deduction to be available in that year — the purchase date alone is not sufficient. This distinction is particularly relevant for assets ordered near year end that may not arrive or be installed until the following income year.

Defined in AASB 112 as the amount attributable to an asset for tax purposes. For depreciating assets, the tax base equals the tax WDV. The temporary difference (carrying amount minus tax base) gives rise to a deferred tax liability when the carrying amount exceeds the tax base — which is the standard situation when accounting depreciation is slower than tax depreciation.

Tax depreciation is a statutory deduction, not an accounting concept. The amount claimed in the tax return should never be automatically replicated in the financial statements. The divergence between tax depreciation and accounting depreciation creates temporary differences that must be recognised under AASB 112.

Taxable purpose is defined in section 40-25(7) of the ITAA 1997 as use for the purpose of producing assessable income or in carrying on a business for that purpose. Use for a non-taxable purpose (private use, exempt income, or non-assessable non-exempt income) reduces the deductible amount proportionally. The taxable purpose proportion must be applied to both the annual decline in value calculation and the termination value on disposal. For accounting purposes, there is no equivalent reduction — the full cost of the asset is capitalised and depreciated regardless of its private use component, with the private use element addressed separately through fringe benefits tax or drawings adjustments.

The taxable purpose proportion is applied under section 40-25 of the ITAA 1997. It reduces the effective cost of the asset for depreciation purposes and must be applied to both the depreciation calculation and the termination value on disposal. The proportion must reflect actual use and should be documented — for motor vehicles, a logbook maintained for a continuous 12-week period is the standard method under section 28-90. The proportion may change from year to year if the nature of use changes, and must be reassessed each income year. For accounting purposes, there is no equivalent concept — assets are carried at full cost and depreciated over their full useful life in the financial statements, with any private-use adjustment treated as a fringe benefit or drawings rather than a reduction in the asset's depreciable amount.

Temporary differences are defined in AASB 112 as differences between the carrying amount of an asset or liability and its tax base. They give rise to deferred tax liabilities (taxable temporary differences — where the carrying amount exceeds the tax base) or deferred tax assets (deductible temporary differences — where the tax base exceeds the carrying amount). For depreciating assets, the temporary difference equals the accounting carrying amount minus the tax WDV. As accounting depreciation is charged over time and the tax concession unwinds, the temporary difference narrows and the deferred tax liability reduces. On disposal, any remaining temporary difference reverses in full. Temporary differences are distinguished from permanent differences, which never reverse — such as the non-deductible portion of entertainment expenses or the accounting gain on revaluation of assets.

TFE was introduced by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020. The concession applied to assets first held and first used or installed ready for use before 30 June 2023. For businesses still holding TFE assets, deferred tax liabilities continue to unwind. Any disposal proceeds from TFE assets are fully assessable as the tax WDV is zero.

Termination value is defined in section 40-300 of the ITAA 1997. For a disposal by sale, the termination value is the consideration received. For a gift or disposal at below-market value to an associate, the termination value is the market value at the time of disposal. For an asset that is lost or destroyed, the termination value includes any insurance proceeds or compensation received. For an asset that simply ceases to be used for a taxable purpose (without a formal disposal), the termination value is the market value at the time of cessation. The termination value must be adjusted for the taxable purpose proportion where the asset has been used partly for private purposes.

The Uniform Capital Allowance system was introduced by the New Business Tax System (Capital Allowances) Act 2001 and commenced 1 July 2001. It replaced multiple prior regimes including the former Division 42 (plant and equipment), the former section 73A (scientific research), and various other capital expenditure provisions. Division 40 of the ITAA 1997 is the primary operative provision. Division 43 (capital works) sits alongside Division 40 but is a separate regime with different rules and rates. The simplified depreciation rules for small business entities in Division 328 operate as a modification of the Division 40 framework rather than a replacement — eligible businesses can elect to use Division 328 instead of tracking each asset individually under Division 40.

Under AASB 116, useful life is defined as the period over which an asset is expected to be available for use, or the number of production or similar units expected to be obtained. Useful life must be reviewed at each reporting date and adjusted prospectively if expectations change. Changes in useful life are changes in accounting estimate under AASB 108, applied prospectively.

The requirement to review useful life at each reporting date is set out in AASB 116 paragraph 51. A change in useful life is a change in accounting estimate under AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, applied prospectively from the date of the change. The revised useful life is applied to the remaining carrying amount of the asset over the remaining revised life — prior periods are not restated. Common triggers for a useful life review include changes in the intensity of use, technological obsolescence, physical condition assessments, changes in maintenance practice, and changes in the regulatory or competitive environment. Residual value should be reviewed at the same time. For tax purposes, a change in accounting useful life has no effect on the Division 40 depreciation calculation — the effective life chosen at the asset's start time continues to apply unless the taxpayer makes a formal self-assessment revision.

The tax WDV under Division 40 is the cost of the asset less all prior year deductions. For pooled assets under Division 328, the WDV of individual assets cannot be determined — only the aggregate pool balance is known. The accounting carrying amount (AASB 116) equals cost less accumulated depreciation less accumulated impairment. Tracking both figures per asset is essential for deferred tax calculations and disposal planning.