Written byAccelerated depreciation is any depreciation method that front-loads deductions, so a business claims more of an asset's cost in the early years of its life and less later.
Also known as: front-loaded depreciation
Key points
- In Australia the accelerated method is diminishing value (reducing balance); double-declining-balance and sum-of-years-digits are overseas textbook methods, not ATO options.
- It defers tax rather than cutting it: total deductions over the asset's life are usually the same, only the timing changes.
- Bigger early deductions lower taxable income and improve near-term cashflow, which can help fund investment or repay debt.
- Front-loading expense also lowers accounting profit in early years, which can affect ratios such as EBITDA and loan covenants.
- Immediate deductions such as the instant asset write-off can replace a multi-year schedule altogether for eligible assets.
How accelerated depreciation works
Straight-line depreciation expenses the same amount every year. An accelerated method instead applies a higher charge while the asset is new and a lower one as it ages. Under diminishing value, each year's depreciation is a fixed percentage of the asset's opening carrying amount (cost less accumulated depreciation), so the charge falls as the balance falls. Double-declining-balance, which uses twice the straight-line rate, and sum-of-years-digits, which allocates cost in descending fractions, are overseas textbook methods you may meet in imported accounting software rather than options for an ATO claim.
For assets that lose value quickly, such as technology and some plant, an accelerated method often reflects how the asset is actually used up. Whichever method you choose, apply it consistently and keep records that justify the claim.
Tax treatment and timing
For tax, Division 40 offers exactly two methods, prime cost and diminishing value, and diminishing value is the accelerated one. Accelerated depreciation changes when you get the deduction, not how much: over the asset's life the total is normally the asset's cost, unless a special write-off applies.
The instant asset write-off can allow an immediate deduction for eligible assets instead of a multi-year schedule, and, while it ran, so could temporary full expensing. Eligibility depends on the asset, the purchase date, turnover tests and whether the asset is second-hand. Where tax deductions run ahead of accounting depreciation, the difference creates deferred tax balances in the accounts.
Choosing a method
Accelerated methods suit businesses that want near-term cashflow relief or own assets that lose value fast. Straight-line suits businesses that need stable earnings for covenants, prefer simpler recordkeeping, or expect to pay tax at a higher rate in future and would rather have their deductions later.
Finance structure matters as well. The tax treatment of a chattel mortgage, finance lease or operating lease differs, so compare the finance option and the tax outcome together. Talk to your accountant or tax agent before electing a method for tax, because the choice is locked in for that asset.
Example
A business buys a $50,000 machine with a five-year effective life. Under diminishing value the rate is 200% divided by five, or 40%, applied to the full cost with no deduction for salvage value. Year one claims $20,000, leaving $30,000. Year two claims 40% of $30,000, or $12,000. Year three claims $7,200, and each later year is smaller again. Prime cost at 20% of the full cost would claim a flat $10,000 a year. Diminishing value gets more of the cost into the early years, and the written-down balance left at the end is squared up by the balancing adjustment when the machine is sold or scrapped.
Not to be confused with
- Reducing balance depreciation
- reducing balance (diminishing value) is one accelerated method; accelerated depreciation is the family of front-loaded methods it belongs to
- Straight-line depreciation
- straight-line charges the same amount every year; accelerated methods charge more early and less later
- Instant asset write-off
- the instant asset write-off deducts an eligible asset's whole cost in one year instead of front-loading it across several
Frequently asked questions
Does accelerated depreciation reduce tax?
It defers tax rather than reducing it. Larger deductions early lower taxable income now, but smaller deductions later raise it. Over the asset's life the total deductible amount is usually the same as under straight-line, unless a special write-off measure applies. The benefit is timing and cashflow, not a permanent saving.
What is the difference between accelerated and straight-line depreciation?
Straight-line spreads the cost evenly, so the deduction is the same every year. Diminishing value, the accelerated method available for tax in Australia, front-loads the charge, so you deduct more while the asset is new and less as it ages. Mainly the timing differs, and diminishing value leaves a balance that the balancing adjustment picks up on disposal.
Can I switch depreciation methods for an asset?
For tax, no. Once you choose prime cost or diminishing value for an asset at first use, that choice is locked in for that asset. You can choose a different method for the next asset you buy. Only the accounting treatment can be revised, as a documented change in estimate.
What happens if I sell the asset early?
You work out the gain or loss as the proceeds less the asset's carrying amount (cost less accumulated depreciation). The tax result depends on whether you have claimed more or less depreciation for tax than in your accounts, and on any roll-over or recoupment rules that apply to the asset.
Do second-hand assets qualify for accelerated depreciation measures?
Eligibility depends on the specific measure. Some temporary allowances exclude certain second-hand assets, and small-business thresholds and aggregated-turnover tests can also affect access to concessions. Check the ATO's rules for the concession you plan to use before assuming a second-hand purchase qualifies.
Related terms
Broader term: Depreciation
Depreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionReducing balance depreciation
Reducing balance depreciation is a depreciation method that charges a fixed percentage of an asset's written-down value each year, so the deduction starts high and falls over time.
Read definitionStraight-line depreciation
Straight-line depreciation is a method that spreads an asset's cost, less its expected salvage value, evenly over its useful life so the same amount is deducted each year.
Read definitionCapital allowances
Capital allowances are the tax deductions you can claim for the decline in value of depreciating assets, such as plant and equipment, that you hold to produce assessable income.
Read definitionInstant asset write-off
The instant asset write-off is a tax concession that lets eligible businesses deduct the full cost of a depreciating asset in the year of first use, up to a threshold.
Read definitionTemporary full expensing
Temporary full expensing is a time-limited tax concession that let eligible businesses deduct a qualifying asset's full cost in its first year of use instead of over its effective life.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.