Depreciation

Depreciation is the measure of the reduction in value of an asset as it ages. Its useful life (the duration to which it will be reduced to zero value in the financial statements) is usually determined via a lookup table provided by the ATO – however a company can choose a different life if the asset is used in a non-standard manner (so it may deteriorate more quickly or more slowly than average). Depreciation is deductible for tax (as a decline in value) as it occurs, rather than as an up-front payment for the asset.

This creates a difference between the profitability on the company books, and the cash status of the company, because payments for assets do not align with their decline in value (most assets are bought up-front and depreciated over several years). It is why EBITDA calculations for company valuations are made without depreciation included.

There are exceptions such as where an asset is written off at the same time as it is purchased under instant asset write off rules.

Leasing assets rather than purchasing them can be much more economical over a short term, especially where maintenance or renewal costs are high and can be included into the lease.