What is straight-line depreciation?

In your accounts, take what you paid for the asset, including capitalised delivery and installation, subtract what you expect to sell it for at the end of its life, and divide the difference by the number of years you will use it. That is the annual charge, and it stays the same every year until the asset's carrying amount reaches the salvage value. Each year you record the charge as a depreciation expense and add it to accumulated depreciation.

Useful life usually comes from the ATO's effective life tables for tax, or from your own assessment under AASB 116 for your accounts. For tax the ATO's prime cost method works differently: the deduction is the asset's cost multiplied by days held over 365, multiplied by 100% divided by its effective life, with no deduction for salvage value. If you are unsure of the salvage value, a zero figure is the simpler, more conservative choice; document how you arrived at it.

For tax the ATO calls its even-spread method prime cost and offers diminishing value as the alternative. Prime cost is worked out on the full cost, not cost less salvage value. Prime cost gives a predictable, even expense that is simpler for budgeting and reporting, but the deductions arrive more slowly. Diminishing value front-loads them: larger deductions early and smaller ones later, at the cost of more complex calculations and balancing adjustments to keep track of.

Straight-line tends to suit assets whose use and wear is fairly uniform, such as office furniture, long-life plant and leasehold improvements. Diminishing value is often used for computers, vehicles and other plant that loses value quickly. Running both schedules for the same asset shows the difference in tax timing. For tax the method is chosen once for each asset and cannot be changed for that asset, so the decision matters at first use.

If the asset is used partly for private purposes, only the business-use portion is deductible, so keep a logbook or usage record. Low-cost assets may instead go into a low-value pool, and time-limited concessions such as the instant asset write-off can allow an immediate deduction instead of an annual one; check the ATO's current eligibility rules before relying on them.

Keep purchase and tax invoices, contracts and installation records, plus an asset register showing each asset's cost, purchase and disposal dates, salvage value, useful life and method. When you sell an asset, calculate depreciation up to the sale date and recognise any gain or loss against the carrying amount. Records generally need to be kept for at least five years.