# Decline in value: first-year deduction

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

## Facts

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

## Answer

**(a) Prime cost method: $6,000**

**(b) Diminishing value method: $12,000**

## Working

Prime cost method:

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

Diminishing value method (the 2 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 for the full year, no reduction
for non-taxable use and no part-year apportionment applies, so the formula amounts are
the deductible amounts in full.

## Controlling authority

The decline in value (capital allowance) rules are in **Division 40 of the Income Tax
Assessment Act 1997 (Cth)** - the uniform capital allowance regime. Specifically:

- The deduction for the decline in value of a depreciating asset is allowed under
  **section 40-25**.
- The **prime cost method** formula is in **section 40-75**.
- The **diminishing value method** formula is in **section 40-72** (which carries the
  200% rate for assets you started to hold, or first used, on or after 10 May 2006;
  the earlier 150% rate is in section 40-70 for assets held before that date).
- Effective life is determined under **Subdivision 40-D** (sections 40-95 onward),
  using either the Commissioner's determination or a self-assessed life.

Division 40 is administered by the Australian Taxation Office (ATO).

## Approach

I applied the two standard first-year decline-in-value formulas supplied in the prompt
to the stated facts (cost $30,000, effective life 5 years, full-year 100% taxable use).
Prime cost gives a flat $6,000 (1/5 of cost); diminishing value gives $12,000 (2/5 of
cost at the 200% rate). I then named the controlling authority, Division 40 of the Income
Tax Assessment Act 1997 (Cth), and identified the specific operative sections for each
method.