What is written-down value (WDV)?

Start with the asset's cost, or its opening written-down balance if you have already claimed depreciation. Work out the year's depreciation using the ATO's effective life for the asset, the days you held it in the income year and the rate for your chosen method. Under diminishing value the deduction is the base value multiplied by days held over 365, multiplied by 200% divided by the effective life; under prime cost it is the cost multiplied by days held over 365, multiplied by 100% divided by the effective life. Subtract the deduction from the opening balance and the result is the closing WDV.

Diminishing value front-loads the deductions, so the WDV falls quickly at first; prime cost reduces it by the same amount every year. For tax, the method you choose for a depreciating asset applies for as long as you hold that asset, though you can choose a different method for a new asset.

WDV is the base for next year's deduction, so it decides how much you can still claim. It also decides the tax result when you dispose of the asset: sale proceeds above the WDV give a taxable gain, and proceeds below it give a deductible loss. Faster depreciation early on cuts tax sooner and can ease short-term cashflow, which is one reason businesses with quickly dating plant choose diminishing value.

In your accounts, the same figure appears as the carrying amount on the balance sheet: the original cost less accumulated depreciation, with the annual depreciation expense in the profit and loss. Bookkeepers using Xero or MYOB map the depreciation expense to the P&L and accumulated depreciation to a contra-asset account, with a note of the method, rate and effective life for each asset.

Use the ATO's listed effective life unless you can justify a different estimate. If the asset is used partly for private purposes, apportion the deduction to the business-use percentage. Low-value assets may be able to go into a pool and be depreciated at the pool rates, which differ between the year an asset is allocated and later years, subject to the ATO's current thresholds and rules. First-year concessions such as the instant asset write-off can allow an immediate deduction, in which case the asset's WDV for tax becomes zero. Temporary full expensing applied only to assets first used or installed ready for use by 30 June 2023.

Keep a depreciation schedule or asset register with each asset's cost, purchase date, effective life, business-use percentage, method and running WDV. The common mistakes are using the wrong effective life or rate, forgetting the days-held adjustment for mid-year purchases and sales, and not apportioning for private use.