Quick answer
Depreciation is the gradual write-down of a physical business asset, such as a vehicle, machine or computer, as it wears out or becomes outdated. It's recorded as an expense in your accounts and claimed as a tax deduction, yet no cash leaves the business. That's why lenders add it back to profit when working out what you can afford, and why they also watch how fast financed equipment loses value.
Key points
- A non-cash expense: profit falls, but the bank balance doesn't
- Lenders usually add depreciation back when assessing loan servicing
- Small businesses can write off assets under $20,000 each in one year
- Market value can drop faster or slower than the tax figures suggest
Depreciation is one of the few business expenses that never shows up on a bank statement. You spend the money once, on the day you buy the excavator or the delivery van, then your accounts spread that cost over the years the asset is in use. The result is a profit figure that’s lower than the cash the business actually generated.
How depreciation is worked out in Australia
For tax, the ATO sets out how a depreciating asset’s cost is claimed over its effective life, the number of years it can reasonably be used to earn income. Two general methods apply:
- Prime cost: the same dollar amount each year.
- Diminishing value: a percentage of the remaining value each year, so the claims are larger early on. The rate is 200% divided by the effective life, so an asset with a 10-year life is written down by 20% of its remaining value each year.
Small businesses (aggregated turnover under $10 million) get a shortcut. Since 1 July 2026, the ATO’s $20,000 per-asset write-off threshold is a permanent part of the system, so each eligible item under that figure can be deducted in full in the year it’s first used. Anything costing more is pooled: the pool claims a 15% deduction for an asset’s first year in it, then 30% of the declining balance annually.
Your accounts may use different figures from your tax return. That’s normal, and it’s one more reason a lender will ask questions rather than read a single number.
Why lenders add depreciation back
When a lender asks whether the business can afford new repayments, it wants to know how much cash is available, not how much tax profit was reported. So depreciation is treated as an add-back: it goes back on top of net profit, along with interest and other non-cash items.
Take a civil contractor whose tax return shows net profit of $85k. Their accountant claimed $70k of depreciation on two tipper trucks and a loader, including a few items under the write-off. A lender looking at servicing will start from about $155k, not $85k, before deducting existing loan repayments. For a business that has just bought a lot of gear, that adjustment can decide whether the application gets over the line.
A practical tip: if one year contains an unusually large write-off, ask your accountant for a one-page note listing it. A lender skimming figures shouldn’t have to guess.
If your tax return understates what the business really earns, send us an enquiry and we’ll read the numbers as a credit assessor would.
The other side: assets lose real value too
Tax depreciation is a formula. Market value is what someone would pay. The two drift apart. A well-kept prime mover may sell for more than its written-down value; specialised fit-out often sells for far less.
Lenders financing equipment care about the market figure, because that’s what they’d recover if the loan went bad. It’s why chattel mortgage terms are kept inside the asset’s working life, and why a residual value or balloon is set conservatively on vehicles that rack up kilometres quickly. You can see how term and balloon change the numbers in our equipment finance calculator.
Related terms
Amortisation is depreciation’s twin for intangible assets. An asset on the balance sheet is shown at its depreciated book value, not its market value.
Buying equipment that will earn its keep?
New machinery pays off over years, and the right finance spreads its cost the same way. Let us know the gear, its approximate price and how trade is going. The form is about sixty seconds’ work and has no effect on your credit score. We don’t send it on to a crowd of lenders: one of our team reads it and gives you a call. Please give accurate turnover and profit figures (depreciation included is fine) so they can point you to a suitable lender straight away.
Frequently asked questions
Why does my accountant's profit look lower than my cash flow?
Depreciation is part of the reason. It reduces reported profit each year to reflect the asset wearing out, but the cash was spent when the asset was bought. Lenders know this and look at earnings before depreciation when assessing a loan.
Is depreciation the same as amortisation?
It's the same principle applied to different assets. Depreciation covers physical assets like trucks and machinery. Amortisation covers intangibles like goodwill, software and licences. In lending, amortisation also means paying a loan down over time.
Does the instant asset write-off help me get a loan?
Not directly. A large write-off can make one year's profit look much lower. Most lenders will add it back, but give them a note from your accountant explaining big one-off deductions so the figures aren't misread.
Can I depreciate equipment I bought on finance?
Generally yes, if the business owns it, as with a chattel mortgage or hire purchase. Under a finance lease or rental the financier owns the asset, so the business usually claims the lease payments instead. Check with your accountant for your structure.
How does depreciation affect equipment as loan security?
Lenders lend against what an asset could sell for, not its book value. If the market value falls faster than the loan balance, the business can owe more than the asset is worth. That's why terms and balloon payments are usually kept within the asset's useful life.