# First-year decline in value

*This is a benchmarking hypothetical, not tax advice. Figures are as at FY2025-26.*

## Inputs

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

## Working

**(a) Prime cost method**

```
decline in value = cost * (1 / effective life)
                 = 30,000 * (1 / 5)
                 = 30,000 * 0.20
                 = 6,000
```

**(b) Diminishing value method**

The 2 in the formula is the 200% rate that applies to assets first used on or after 10 May 2006.

```
decline in value = cost * (2 / effective life)
                 = 30,000 * (2 / 5)
                 = 30,000 * 0.40
                 = 12,000
```

Because the asset is used 100% for a taxable purpose and a full year applies, no apportionment reduces either figure.

## Answer

- **(a) Prime cost method: $6,000**
- **(b) Diminishing value method: $12,000**

## Controlling authority

The decline in value (capital allowance) rules are governed by **Division 40 of the Income Tax Assessment Act 1997 (Cth)** - the "Capital allowances" Division. The prime cost and diminishing value methods, and the 200% diminishing value rate for assets first used on or after 10 May 2006, are set out within that Division (the core decline-in-value provisions are in Subdivision 40-B, section 40-70 for prime cost and section 40-72/40-75 for diminishing value).

## Note on approach

The task supplies the two formulas to use, so this is a direct arithmetic application rather than a question of selecting a method. I substituted the given cost ($30,000) and effective life (5 years) into each formula, confirmed the full-year, 100% taxable-purpose facts mean no apportionment factor applies, and computed each first-year deduction. I then identified Division 40 of the ITAA 1997 as the controlling authority for the capital allowance / decline-in-value regime.