FINANCIAL LITERACY • 11 JULY 2025 • 7 MIN READ
What is depreciation (and why does it matter)?

SECTIONS
What is depreciation?
Why do businesses use depreciation?
What can you depreciate?
How is depreciation calculated?
How does depreciation work with the 20% Investment Boost?
Summary
As a New Zealand business owner you’ll often buy assets to help run your business. For example, a laptop, car, office furniture, and machinery. These things all cost significant sums of money. While they’re all vital for your business operations, their value isn’t static. Over time they wear out, become obsolete, lose their original worth or get replaced.
This is where depreciation comes in.
What is depreciation?
In simple terms, depreciation is an accounting method that allows businesses to spread the cost of an asset over a period of time (also known as ‘its effective life’).
Instead of claiming the full cost of the asset as a deductible expense in the year it was purchased, you claim a portion of the cost each year based on its estimated lifespan.
For example, if you bought a piece of machinery for $50,000 and it’s expected to last 10 years, you might claim $5,000 each year for 10 years, rather than claiming $50,000 in 1 year.
Depreciation helps acknowledge that your assets contribute to your business’s income over its entire lifespan rather than only in the year it was purchased.
Why do businesses use depreciation?
Depreciation might feel like just another technical term, but it's very useful in the world of business.
Reasons include: tax deductions, knowing the real value of assets, better reporting, asset management and planning.
Tax deductions
This is often the most compelling reason for business owners to understand depreciation. In New Zealand, the cost of most depreciating assets is tax-deductible over their effective life.
Of course, a lower taxable income often translates to a lower tax bill, freeing up cash for other essential business activities. What business owner wouldn’t want that?
Knowing the value of your assets
A car bought for $30,000 isn’t worth $30,000 forever. Depreciation helps track how much it's worth now, not just what you paid for it.
This is also known as its book value, which is the original cost of the asset minus any accumulated depreciation.
Example:
Car was bought for $30,000
Total accumulated depreciation (over the last few years): $20,000
Current book value = $10,000
Please note that book value does not always equate to market value, but does provide a close comparison.
Asset management and planning
Tracking depreciation can give you insights into the aging of assets. This can be extremely valuable for planning for replacements, upgrades or maintenance. It also helps ensure your operations remain efficient over time. Having an asset register that records this information is also useful for insurance purposes.
Accurate financial reporting and business health
Depreciation provides a more accurate picture of your business's profitability over time. By allocating the cost of an asset across a longer period of time, your financial statements will better reflect the true cost of running your business, rather than showing a massive expense hit in the year of purchase. This is crucial for internal decision-making, as well as for attracting investors or securing loans.
Having fixed assets on your balance sheet also gives a better representation of what your business owns, which helps third parties assess the overall health and worth of the business.
What can you depreciate?
Generally, you can depreciate assets with a cost over $1,000, that:
- You own (or have leased under a finance lease arrangement) and have control over,
- Are used to produce assessable income,
- Are expected to decline in value over time, and,
- Have a useful life of more than 1 year
Common depreciating assets include:
- Plant and machinery
- Motor vehicles
- Office furniture
- Computers and software
- Mobile phones
You can’t depreciate things like stock, land or residential and commercial buildings. (Land is generally not a depreciating asset as it typically doesn’t decline in value).
How is depreciation calculated?
There are a few different ways depreciation can be calculated, but you don’t need to do all the maths yourself. That’s what your accountant is for.
Here are the two common methods that Inland Revenue allows:
1. Diminishing Value Method
You claim more in the earlier years, and less as the asset gets older. It’s like how a car loses most of its value in the first few years. With this method, you get a higher expense claim in the first years.
2. Slight Line Method
You claim the same amount each year over the asset’s effective life. This can be useful for tax planning purposes as the depreciation expense claim remains consistent.
The Inland Revenue determines what depreciation rate is used for different types of assets under each method.
How does depreciation work with the 20% Investment Boost?
The government released the 20% Investment Boost in its May 2025 budget as a way to encourage productivity and economic growth. The deduction allows businesses to immediately claim 20% of the cost of new assets, on top of standard depreciation.
Read more about it in our Investment Boost article.
Summary
Depreciation is more than just an accounting term. It’s a valuable tool that can impact your business's profitability and tax position.
Understanding how it works and why it’s important is useful for effectively managing your business assets, operational efficiency, and finances.
For tailored assistance on how depreciation applies to your business assets and to ensure you’re maximising eligible deductions, its always recommended to consult your accountant.
Alaina Smith
Lead Accountant
Lives in the sunniest part of the country, running around after kids and the dog.
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