Straight Line Depreciation — Formula, Examples & ATO Guide

Updated 12 Mar 2026Content was accurate at the time of publication

Straight‑line depreciation (also called prime cost for tax purposes) allocates the depreciable amount of an asset evenly over its useful life. In plain terms: you assume the asset loses the same monetary value each year until it reaches its residual (salvage) value.

What is straight‑line depreciation?

Straight‑line = even annual charge.

Diminishing value (declining balance) = higher charge in early years, decreasing over time.

The core formula is straightforward:

Annual depreciation = (Cost − Residual (salvage) value) / Useful life (years)

Where:

Cost = purchase price plus any capitalisable costs (installation, delivery).
Residual (salvage) value = estimated disposal value at end of useful life.
Useful life = expected productive life (years), often from ATO effective life tables or AASB guidance.

Plain English: take what you paid, subtract what you expect to sell it for later, and spread the difference evenly across the number of years you'll use it.

Quick spreadsheet notation:

=(Cost - Residual) / UsefulLife

Excel built‑in:

=SLN(cost, salvage, life)

Step‑by‑step worked example (with numbers)

Example: You buy a specialised machine for $18,000 including installation. Estimated useful life: 6 years. Estimated residual value: $1,000.

Depreciable amount = $18,000 − $1,000 = $12,000
Annual straight‑line depreciation = $12,000 / 6 = $1,000 per year

Depreciation schedule (6‑year extract):

Year	Opening carrying amount	Depreciation expense	Closing carrying amount
1	$48,000	$7,000	$41,000
2	$41,000	$7,000	$34,000
3	$34,000	$7,000	$27,000
4	$27,000	$7,000	$20,000
5	$20,000	$7,000	$13,000
6	$13,000	$7,000	$6,000

Journal entry each year:

Dr Depreciation expense $1,000
Cr Accumulated depreciation $1,000

At the end of year 6, closing carrying amount should equal estimated residual $1,000 (assuming no impairment or disposal).

How to handle part‑year acquisitions and disposals

Part‑year rules matter because many assets are bought or sold mid‑year. Under the prime‑cost approach you generally pro‑rata the annual depreciation for the period you held the asset.

Prorated depreciation (days method): Prorated depreciation = Annual depreciation × (Days held in the income year / Days in the income year)

Example — Part‑year acquisition:

Asset cost $12,000; residual $1,000; life 5 years → annual depreciation = ($12,000−$1,000)/5 = $1,000.
Purchased 1 October; financial year ends 30 June (273 days remaining of 365).
First year depreciation = $1,000 × (273 / 365) ≈ $1,495.

Example — Disposal mid‑year:

If you sell, compute depreciation up to disposal date (pro‑rata), remove the asset and accumulated depreciation, and recognise gain or loss (proceeds − carrying amount).

ATO short‑period rules and exact day count conventions can vary — check ATO guidance for precise rounding and treatment.

Effective life and salvage (residual) value — what to use

Choosing useful life and residual value drives depreciation.

Sources for useful life:

ATO effective life tables are a primary reference for tax purposes. For the latest lists and default lives, consult the ATO: https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/Depreciation/Effective-life/
AASB 116 (Property, Plant and Equipment) provides accounting guidance on assessing useful life and re‑assessing when circumstances change: https://www.aasb.gov.au

Residual (salvage) value:

Estimate conservatively if you intend to sell. If uncertain, set residual to zero for a simpler, conservative approach.
For tax claims, use amounts that reflect likely disposal proceeds — and document how estimates were made in your records.

If actual disposal proceeds differ materially:

For accounting: recognise gain or loss on disposal against carrying amount.
For tax: adjustments may be required in the year of disposal (consult ATO guidance or a tax agent).

When to choose straight‑line (prime cost) vs diminishing value

Choosing method affects timing of tax deductions and reported profit.

Straight‑line (prime cost)

Pros:
- Predictable, even expense each year.
- Simpler for budgeting and financial reporting.
- Preferred where asset usage/wear is fairly uniform (buildings, furniture).
Cons:
- Slower tax deductions in early years vs diminishing value.

Diminishing value

Pros:
- Larger deductions in early years — useful if you want earlier tax relief.
- Often used for technology or vehicles that lose value quickly.
Cons:
- More complex calculations and you must keep track of balancing adjustments.

Practical choice examples:

Use straight‑line for plant, long‑life equipment, office furniture, leasehold improvements.
Use diminishing value for computers, vehicles or plant that loses value quickly.

Compare outcomes numerically to choose: for an asset $10,000, 4‑year life, zero residual:

Straight‑line = $1,000/year.
Diminishing value at a given DV rate gives larger early deductions — run both schedules to compare tax timing.

ATO prime‑cost rules, adjustments and record keeping

The ATO uses "prime cost" terminology as the straight‑line method for tax depreciation. Key highlights:

Use ATO effective life tables to determine useful life for tax claims unless you can justify a different life and document the rationale.
Private/non‑taxable use: if an asset is used partly for private purposes, reduce the depreciation deduction proportionally to the taxable portion (track logbooks or usage records).
Low‑value pool: assets under the low‑value threshold may be allocated to a low‑value pool with accelerated deductions.
Temporary measures: instant asset write‑offs or temporary full expensing are time‑limited. Check ATO dates and eligibility before applying.

Record keeping (what to keep and retention):

Purchase invoices, tax invoices, contracts, delivery and installation records.
Asset register with acquisition and disposal dates, cost, residual value, useful life and depreciation method.
Usage logs for private vs business use (e.g., vehicle logbook).
Retention: generally keep records for at least 5 years from when you prepared or obtained them (confirm current ATO retention rules).

Excel and calculator help

Excel SLN:

Built‑in function: =SLN(cost, salvage, life)
- Example: =SLN(48000,6000,6) returns 7000.
Manual cell formula: =(B2 - B3) / B4 where B2=Cost, B3=Residual, B4=Life.

Create a calculator-ready sheet with these input cells:

Cost ($)
Residual ($)
Useful life (years)
Acquisition date
Financial year end
Days held (auto calculated)
Annual depreciation, prorated depreciation

Simple CSV depreciation schedule (copy this into a file named depreciation-schedule.csv and open in Excel):

Year,Opening carrying amount,Depreciation expense,Accumulated depreciation,Closing carrying amount
1,48000,7000,7000,41000
2,41000,7000,14000,34000
3,34000,7000,21000,27000
4,27000,7000,28000,20000
5,20000,7000,35000,13000
6,13000,7000,42000,6000

Worked examples for common asset types

1. Vehicle (business‑use car)

Cost: $15,000; residual $1,000; life 8 years.
Annual straight‑line = ($15,000 − $1,000)/8 = $1,750.
If private use 20% → deductible portion = 80% × $1,750 = $1,000.

2. Computer / laptop (short life)

Cost: $1,300; residual $100; life 3 years.
Annual = ($1,300 − $100)/3 = $1,000.
Many businesses elect immediate write‑off or pool treatment if under thresholds — check temporary measures and low-value pool rules.

3. Agricultural tractor (heavy equipment)

Cost: $120,000; residual $10,000; life 10 years.
Annual = ($120,000 − $10,000)/10 = $10,000.
May be financed via equipment or tractor finance — see equipment finance options that change cashflow and may affect timing of deductions (interest vs depreciation).

Common mistakes and pitfalls

Wrong useful life: using an overly short or long life skews profit and tax. Fix: justify life using ATO tables or AASB assessment.
Forgetting residual value: setting residual to zero when there will be a sale understates closing value.
Incorrect part‑year prorata: always calculate days held and apply consistent day‑count method.
Not adjusting for private use: track and reduce deductions for non‑taxable usage (e.g., personal travel).
Misclassifying assets into pools: small assets may belong in a low‑value pool; check thresholds.
Switching methods without documentation: if you change to or from prime cost, document reasons and impact.

Quick fix checklist:

Reconcile asset register vs fixed asset ledger.
Recalculate using =SLN() for straight‑line and compare with manual.
Keep acquisition/disposal documentation and usage logs.

FAQ

Can you change depreciation method later?

Yes — but you must document the rationale and apply consistently; tax rules may require adjustments. Consult ATO guidance before changing methods.

Does salvage (residual) value affect taxable income on disposal?

Disposal gain/loss = proceeds − carrying amount. Residual influences carrying amount; actual proceeds determine tax outcome.

How do I record depreciation in my BAS/Tax return?

Depreciation reduces taxable income; report capital allowances per the tax return instructions. Keep supporting schedules and use ATO effective life tables for tax positions.

What if useful life needs revision?

Reassess estimates if circumstances change (e.g., new maintenance policy). For accounting, update prospectively; for tax, follow ATO rules.

Should low‑value items be pooled?

If assets meet the low‑value pool criteria, pooling may give simplified and faster deductions.

How long should I keep depreciation records?

Generally at least 5 years from when records were prepared or obtained — retain invoices, schedules, disposal docs and usage logs.

Is impairment the same as depreciation?

No. Depreciation allocates cost over useful life; impairment recognises a permanent reduction in recoverable amount and is treated separately under accounting standards (AASB).

Can you claim full expensing or instant write‑off instead?

Time‑limited concessions exist; check current ATO eligibility and effective dates before applying.

Key takeaways

Straight‑line (prime cost) depreciation is the simplest method to spread an asset's depreciable amount evenly across its useful life. Use the formula Annual depreciation = (Cost − Residual) / Useful life, pro‑rata for part‑year assets, and source useful lives from ATO tables or AASB guidance. Keep a clear asset register, supporting invoices and usage logs, and run both straight‑line and diminishing value scenarios to understand tax timing.