Asset Depreciation Definitions

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What is a Depreciating Asset?

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.

Land and items of trading stock are specifically excluded from the definition of depreciating asset.

Most intangible assets are also excluded from the definition of depreciating asset.

Guide to Depreciating Assets 2020 Cover Image

Adjustable value

A depreciating asset’s adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time.

The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

Balancing adjustment amount

The balancing adjustment amount is the difference between the termination value and the adjustable value of a depreciating asset at the time of a balancing adjustment event.

If an asset’s termination value is greater than its adjustable value, the difference is generally an assessable balancing adjustment amount.

If the termination value is less than the adjustable value, the difference is generally a deductible balancing adjustment amount.

Car limit

If the first element of cost of a car exceeds the car limit for the financial year in which you start to hold it, that first element of cost is generally reduced to the car limit. The car limit for 2018–19 is $57,581.

Days held

Days held is the number of days you held the asset in the income year in which you used it or had it installed ready for use for any purpose.

Decline in value

Deductions for the cost of a depreciating asset are based on the decline in value. For most depreciating assets, you have the choice of two methods to work out the decline in value of a depreciating asset: the prime cost method or the diminishing value method.

Depreciating asset

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Effective life

Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose or for the purpose of producing exempt income or non-assessable non-exempt income:

Having regard to the wear and tear from your expected circumstances of use assuming it will be maintained in reasonably good order and condition, and having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

First element of cost

The first element of cost is, broadly, the amount paid (money or the market value of property given) or the amount taken to have been paid to hold the asset. It also includes amounts incurred after 30 June 2005 that are taken to have been paid for starting to hold the asset. The amounts must be directly connected with holding the asset.


Only a holder of a depreciating asset may deduct an amount for its decline in value. In most cases, the legal owner of a depreciating asset will be its holder.


Indexation is a methodology used in calculating a cost for capital gains tax for depreciating assets acquired before 21 September 1999 that have been used partly for a private purpose.

Second element of cost

The second element of cost is, broadly, the amount paid (money or the market value of property given) or the amount taken to have been paid to bring the asset to its present condition and location at any time, such as the cost incurred to improve the asset.

It also includes expenses incurred after 30 June 2005 on a balancing adjustment event occurring for the asset, such as advertising or commission expenses.

Start time

A depreciating asset’s start time is generally when you first use it (or install it ready for use) for any purpose, including a private purpose.

Taxable purpose

A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.

Termination value

Generally, the termination value is what you receive or are taken to receive for an asset as a result of a balancing adjustment event. For example, the proceeds from selling an asset would be the asset’s termination value.

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