# ACC-0006 - Decline in Value: First-Year Deduction

## Inputs

| Item | Value |
|---|---|
| Cost of asset | $30,000 |
| Effective life | 5 years |
| Taxable use | 100% |
| Days held / days in year | Full year (no part-year apportionment) |

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## (a) Prime cost method

Formula: cost x (1 / effective life)

Working:

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

**First-year deduction (prime cost): $6,000**

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## (b) Diminishing value method

Formula: cost x (2 / effective life)

The multiplier of 2 reflects the 200% rate that applies to assets first held on or after 10 May 2006.

Working:

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

**First-year deduction (diminishing value): $12,000**

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## Controlling authority

The decline in value (capital allowances) rules are contained in **Division 40 of the Income Tax Assessment Act 1997 (Cth)** (ITAA 1997).

Specifically:

- **Section 40-65** sets out the **prime cost method** formula.
- **Section 40-70** sets out the **diminishing value method** formula.
- **Section 40-95** governs how to determine the effective life of a depreciating asset.
- **Section 40-25** identifies which taxpayers can deduct a decline in value and the general conditions (held and used or installed ready for use for a taxable purpose).

The 200% rate (the "2" in the diminishing value formula) for assets first held on or after 10 May 2006 is found in section 40-70(1)(b) of the ITAA 1997.

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## Approach

Applied the two statutory formulas as given in the prompt, using cost = $30,000 and effective life = 5 years, with 100% taxable use and a full year. Identified Division 40 of the ITAA 1997 as the controlling authority, with the specific prime cost and diminishing value sections cited.