Depletion in Australia: What Business Owners Need to Know in 2025

When most Australian business owners think about the costs of running their enterprise, they focus on payroll, rent, and equipment. But if your business deals with natural resources—like mining, agriculture, or forestry—there’s another major factor to consider: depletion. While depreciation covers wear and tear on tangible assets, depletion is all about the gradual consumption of natural resources. In 2025, with tightening regulations and evolving tax rules, understanding depletion is more crucial than ever.

What Is Depletion and Why Does It Matter?

Depletion refers to the allocation of the cost of extracting natural resources (like minerals, oil, gas, timber, or even water) over the period they’re used. Unlike depreciation, which applies to man-made assets, depletion recognises that natural resources are finite—once they’re gone, they’re gone for good. For businesses in mining, energy, and agriculture, this accounting method is vital for accurately reflecting resource value and profit.

• Mining and Energy: Depletion is used to account for the extraction of minerals, oil, or gas from the ground.

• Agriculture and Forestry: Applies to timberlands or other renewable but exhaustible resources.

• Water Rights: In some regions, businesses must track the usage and value of water licenses as a depletable asset.

Failing to account for depletion can inflate profits on paper, leading to higher tax liabilities and a skewed view of your business’s true financial health.

Depletion and Tax: What’s New in 2025?

The 2025 financial year brings notable updates to how depletion is handled for tax purposes in Australia. The Australian Taxation Office (ATO) continues to refine guidance on allowable deductions for depleting assets, especially in the resource sector. Here are the key changes and reminders for this year:

• Resource Rent Tax Adjustments: The ATO has clarified how companies should apportion depletion allowances for projects with mixed-resource outputs, such as combined oil and gas fields.

• Increased Scrutiny on Valuations: The ATO is focusing on the accuracy of reserve estimates and the methods used to calculate depletion, especially after several high-profile audit cases in 2024.

• Environmental Provisions: New environmental compliance measures require companies to factor in rehabilitation costs when calculating depletion, impacting both the allowable deduction and future obligations.

For example, a mining business extracting iron ore in Western Australia must now report not only the tonnage extracted but also update its resource estimates annually, ensuring that depletion deductions reflect current economic realities and environmental responsibilities.

Smart Strategies for Managing Depletion in Your Business

Effectively managing depletion isn’t just about compliance—it’s about making strategic decisions that protect your bottom line and future-proof your business. Here’s how you can stay ahead:

• Accurate Reserve Estimates: Use the latest geological data and technology to ensure your resource estimates are realistic. Overstating reserves can lead to overstated profits and future write-downs.

• Regular Asset Reviews: Schedule annual reviews of your natural resource assets. Adjust your depletion schedules as new information emerges—especially after significant extraction or market shifts.

• Integrate Environmental Costs: Factor in the end-of-life costs of site rehabilitation into your depletion calculations, especially with new environmental compliance requirements in 2025.

• Tax Planning: Work closely with your accountant to ensure you’re claiming all allowable depletion deductions and preparing for any ATO reviews.

Case in point: An agribusiness with a large timber plantation in Queensland recently implemented satellite monitoring to better track forest growth and harvest rates. This not only improved their depletion accuracy but also helped optimise harvesting schedules and comply with local environmental regulations.

The Bottom Line

Depletion may seem like a technical accounting detail, but for Australian businesses relying on natural resources, it’s a critical driver of financial performance and compliance. With 2025’s updated tax rules and environmental standards, now is the time to ensure your depletion strategy is up to scratch. Stay proactive, keep your estimates current, and turn depletion from a hidden cost into a managed asset.