What is salvage value?

When you buy a ute, machine or computer, you estimate what it will be worth when you have finished with it. That figure is the salvage value. Subtract it from the cost and you have the depreciable amount, which is spread over the years you expect to use the asset. A conservative estimate gives higher annual depreciation and lower reported profit in the early years; an optimistic one does the opposite.

Common ways to estimate it are your own past disposal results, resale and auction prices for similar assets, manufacturer guidance, published age-based tables for vehicles and machinery, or a professional valuation for high-value or unusual equipment. A zero salvage value is common for assets that date quickly, such as IT equipment, and is acceptable if you can justify it. Whatever figure you choose, record the sources in your asset register and review it at least once a year.

For your financial statements, AASB 116, the accounting standard for property, plant and equipment, requires you to estimate each asset's useful life and residual value, which is the standard's own name for the salvage value, and to review those estimates at least annually. The ATO's tax depreciation rules work differently: they use effective life rather than your own estimate, allow particular methods, and offer concessions such as the instant asset write-off and simplified depreciation pools for small businesses, which can reduce the practical effect of salvage value on tax timing.

If the actual sale proceeds differ from the estimate, you record a gain or loss on disposal in your accounts, and a gain may be assessable for tax. Keep the reasoning behind your estimates in case the ATO asks, and check with your accountant on how the accounting and tax figures reconcile.

Salvage assumptions drive lease and loan structures too. A lessor sets rentals to recover the asset's cost minus its expected end-of-term value, plus a margin, so the higher the expected value the lower the rentals. Finance contracts often include a balloon payment that works the same way, and some lessors ask the lessee to cover a minimum residual, which shifts the disposal risk to them.

That is why financiers stress-test salvage assumptions when they price risk. Before signing an equipment finance agreement, check how the residual was set and what happens if the asset sells for less at the end of the term: sale, return, trade-in or payout.