# Decline in value: first-year deduction

## Working

Given:
- Cost = $30,000
- Effective life = 5 years
- Taxable-purpose use = 100% (no reduction)
- First used on the first day of the income year, so a full year applies (no part-year apportionment)

### (a) Prime cost method

Formula: `cost * (1 / effective life)`

= $30,000 * (1 / 5)
= $30,000 * 0.20
= **$6,000**

### (b) Diminishing value method

Formula: `cost * (2 / effective life)` (the 2 represents the 200% rate for assets first used on or after 10 May 2006)

= $30,000 * (2 / 5)
= $30,000 * 0.40
= **$12,000**

## Answer

| Method | First-year decline in value |
|---|---|
| (a) Prime cost | $6,000 |
| (b) Diminishing value | $12,000 |

## Controlling authority

The decline in value (capital allowance) rules are contained in **Division 40 of the Income Tax Assessment Act 1997 (Cth)** ("Capital allowances"). The core deduction provision is **section 40-25 (ITAA 1997)**, with the two methods and their formulas set out in **section 40-70 (prime cost)** and **section 40-72 / 40-75 (diminishing value)**, and the 200% diminishing-value rate applying to assets first used (or installed ready for use) on or after 10 May 2006.

## Note on approach

I applied the two formulas exactly as specified in the task. Both calculations use the full asset cost of $30,000 because the asset is used 100% for a taxable purpose (no use-based reduction) and a full year applies (no part-year apportionment), so neither result is scaled down. Prime cost gives a straight-line 20% of cost ($6,000); diminishing value applies double that rate in year one to the full cost ($12,000). The controlling authority for the decline-in-value/capital-allowance regime is Division 40 of the Income Tax Assessment Act 1997 (Cth).