Amortisation
Learn what amortisation means, how to calculate it, and how it applies to your Australian business.
Published Monday 22 June 2026
Table of contents
Key takeaways
- Amortisation is the process of spreading the cost of an intangible asset over its useful life, or paying down a loan through regular payments.
- In Australia, only certain intangible assets (like patents, copyrights, and software licences) can be amortised for tax purposes. Goodwill and trademarks can't be amortised.
- The straight-line method and the diminishing value method are the 2 main approaches used in Australia.
- Amortisation helps your business report accurate profits, lower tax liability, and plan budgets more effectively.
- Amortisation applies to intangible assets, while depreciation applies to tangible (physical) assets.
What is amortisation?
Amortisation is the process of gradually writing off the cost of an intangible asset over its useful life. It can also refer to paying down a loan through regular scheduled payments.
When your business buys an intangible asset (like a patent or software licence), you don't expense the full cost in the year you buy it. Instead, you spread that cost across the years you'll use it. This is amortisation, and it applies to both your financial reports and your tax returns.
The term also applies to loans. When you make regular repayments on a mortgage or business loan, you're amortising that debt over time.
How amortisation works
Amortisation records the declining value of an intangible asset on your financial statements over time.
When you buy an intangible asset, you record its full value on your balance sheet. Each year, you reduce that value by the amortisation amount. This reduction appears as an expense on your profit and loss statement.
An amortisation schedule tracks this process. It shows exactly how much of the asset's value is written off each period and what the remaining book value is. For loans, an amortisation schedule breaks down each payment into the portion that goes towards interest and the portion that reduces the principal.
This process continues until the asset reaches the end of its useful life or the loan is fully repaid.
Asset amortisation vs loan amortisation
There are 2 main types of amortisation, and they work differently.
Asset amortisation
Asset amortisation applies to intangible assets: non-physical things your business owns that have value, like patents, copyrights, and software licences. You spread the purchase cost of the asset across the years you expect to use it. Each year, you record an amortisation expense that reduces the asset's book value.
Loan amortisation
Loan amortisation is how you pay down a debt through regular, scheduled payments. Each payment covers both principal and interest. Early in the loan term, a larger share of each payment goes towards interest. Over time, more of each payment reduces the principal balance.
Common amortised loans include mortgages, car loans, and business loans.
Why amortisation matters for your business
Amortisation isn't just an accounting requirement. It gives you a clearer picture of how your business is performing.
- Accurate profit reporting: spreading an asset's cost over its useful life avoids distorting your profits in any single year.
- Lower tax liability: amortisation expenses reduce your taxable income each year, which can lower your tax bill at the end of the financial year.
- Better budgeting: knowing your amortisation schedule helps you plan cash flow and allocate resources.
- Matching costs with revenue: you recognise expenses in the same periods that the asset generates value for your business.
- Tax compliance: the Australian Taxation Office (ATO) requires you to follow specific rules when claiming amortisation deductions.
What assets can and can't be amortised in Australia
Not all intangible assets qualify for amortisation under Australian tax law. It's important to know which assets are eligible so you claim the right deductions.
Assets that can be amortised
Under Division 40 of the Income Tax Assessment Act 1997, certain intangible assets are classified as depreciating assets with statutory effective lives. These include:
- Patents
- Copyrights
- Software licences
- Registered designs
- In-house software developed for internal use
Assets that can't be amortised
Some intangible assets don't qualify as depreciating assets, which means you can't claim amortisation deductions for them. These include:
- Goodwill: while goodwill is recorded on the balance sheet after a business acquisition, it's not a depreciating asset under Australian tax law and can't be amortised as a tax deduction. For financial reporting purposes, goodwill is tested for impairment each year rather than amortised.
- Trademarks: like goodwill, trademarks are not depreciating assets under Division 40 and can't be amortised for tax purposes.
Always check with your accountant or the ATO to confirm whether a specific asset is eligible. You can find an accountant through the Xero advisor directory.
How to calculate amortisation
The most common way to calculate amortisation for intangible assets is the straight-line method. Here's how it works, step by step.
- Determine the total cost of the asset (including any purchase and registration fees).
- Estimate the asset's useful life in years. The ATO sets statutory effective lives for many intangible assets.
- Divide the total cost by the number of years of useful life. This gives you the annual amortisation expense.
For example, say your business buys a patent for $100,000 with a useful life of 10 years. The annual amortisation expense would be $100,000 / 10 = $10,000 per year. After year 1, the patent's book value drops to $90,000. After year 2, it's $80,000, and so on until the book value reaches $0.
Some accounting software can automate these calculations, but you'll need to make sure the inputs are correct and comply with ATO rules.
Common methods of amortisation
There are several methods for calculating amortisation. In Australia, the ATO recognises 2 main methods for tax purposes.
Straight-line method (prime cost)
An equal portion of the asset's cost is written off each year over its useful life. This is the simplest method and the most commonly used for intangible assets.
For example, a $150,000 asset with a 15-year useful life would have an amortisation expense of $10,000 per year.
Diminishing value method
A larger amount is written off in the earlier years, with smaller amounts in later years. This reflects that many assets deliver more value when they're new.
For example, if an asset costs $10,000 and you apply a 30% diminishing value rate, you'd amortise $3,000 in year 1. In year 2, the remaining value is $7,000, so you'd amortise $2,100 (30% of $7,000). This pattern continues until the asset is fully written off.
Your accountant can help you choose the right method based on the type of asset and ATO requirements.
Amortisation vs depreciation
Amortisation and depreciation are closely related, but they apply to different types of assets.
- Amortisation applies to intangible assets: non-physical things like patents, copyrights, and software licences.
- Depreciation applies to tangible assets: physical things like vehicles, equipment, and machinery.
- Both spread the cost of an asset over its useful life.
- Both are recorded as non-cash expenses on your profit and loss statement.
- Intangible assets typically have no salvage value at the end of their useful life, while tangible assets often do.
The key difference is the type of asset. If it's something you can touch, it's depreciation. If it's non-physical, it's amortisation. You can learn more about depreciation methods and how they apply to your business.
Simplify amortisation with accounting software
Tracking amortisation manually can be time-consuming, especially when you're managing multiple assets with different useful lives and methods. Cloud accounting software can automate the calculations, generate amortisation schedules, and keep your records accurate for tax time. Get one month free.
FAQs on amortisation
Here are some frequently asked questions about amortisation.
Can a single asset be both amortised and depreciated?
No. Each asset is classified as either tangible or intangible. Tangible assets are depreciated, and intangible assets are amortised. An asset can't fall into both categories at the same time.
Can goodwill be amortised in Australia?
No. Goodwill is not a depreciating asset under Australian tax law, so it can't be amortised as a tax deduction. For financial reporting, goodwill is subject to annual impairment testing instead.
What is an amortisation schedule?
An amortisation schedule is a record that shows how an asset's value or a loan balance decreases over time. For loans, it breaks each payment into the interest and principal portions.
Is amortisation an expense or a liability?
Amortisation is a non-cash expense. It appears on your profit and loss statement and reduces the book value of the asset on your balance sheet. It's not a liability.
How long can you amortise an intangible asset?
The amortisation period depends on the asset's useful life. The ATO sets statutory effective lives for many intangible assets. For example, a patent is typically amortised over its remaining term.
Related terms
Learn more about amortisation
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.