# Decline in value - first-year deduction

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

## Given

- Cost of asset: $30,000
- Effective life: 5 years
- Taxable-purpose use: 100%
- 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**

First-year deduction under the prime cost method: **$6,000**.

## (b) Diminishing value method

Formula: `cost * (2 / effective life)`

The factor of 2 is the 200% rate that applies to assets first used (or installed ready for use) on or after 10 May 2006.

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

First-year deduction under the 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 "uniform capital allowances" provisions). The two methods for working out decline in value, and the 200% diminishing value rate for assets first used on or after 10 May 2006, sit within that Division (see s 40-65, s 40-70, and s 40-72 ITAA 1997).

## Approach

I applied the two formulas given in the task directly. Because use is 100% for a taxable purpose and a full year applies, no apportionment factor reduces either figure. Prime cost spreads the cost evenly (1/5 per year = $6,000), while diminishing value applies double that rate in the first year (2/5 = $12,000). I named Division 40 ITAA 1997 as the controlling authority for the uniform capital allowance / decline in value rules.