Unit of Production Depreciation Explained for 2025 | Cockatoo

The way your business depreciates assets isn’t just a technicality—it can have a direct impact on your cash flow, tax position, and even investment decisions. In 2025, with updates to Australian tax policy and increasing demand for transparency in financial reporting, the Unit of Production (UoP) method is attracting renewed attention. Whether you’re running a manufacturing plant, managing a fleet, or investing in mining equipment, understanding UoP can help you make smarter financial choices.

What Is the Unit of Production Method?

The Unit of Production method is a way to calculate depreciation based on how much an asset is actually used, rather than simply the passage of time. Unlike straight-line or diminishing value methods—which spread the cost over years regardless of usage—UoP ties depreciation directly to the number of units produced or hours operated. This means your financial statements more accurately reflect the wear and tear on your assets.

• Best for: Businesses with assets whose value is closely linked to usage (e.g. machinery, vehicles, mining equipment).
• Formula: (Cost – Residual Value) × (Units Produced in Period ÷ Total Estimated Units)

For example, if a printing press is expected to produce 5 million copies over its life, and it prints 500,000 in 2025, you’ll depreciate 10% of its depreciable value that year.

Why the Unit of Production Method Matters in 2025

Australian tax policy has seen several updates in the last year, particularly concerning asset write-offs and capital allowances. The ATO’s 2025 guidelines confirm that businesses can choose the UoP method for eligible assets, as long as accurate usage records are maintained. This flexibility is especially valuable for industries facing fluctuating demand or unpredictable operating schedules.

• Tax Planning: UoP can front-load or defer deductions depending on asset usage, helping to manage taxable income strategically.
• Cash Flow: During high-production years, larger depreciation deductions can boost after-tax cash flow—a crucial advantage in volatile sectors.
• Compliance: The ATO requires thorough logs or records to justify usage-based claims, so investing in tracking technology is a smart move.

In 2025, many mining companies and transport operators are upgrading their ERP systems to automatically log asset usage, ensuring that their UoP claims stand up to audit scrutiny.

Real-World Applications and Strategic Benefits

Let’s consider a few Australian examples:

• Mining: A haul truck expected to move 1 million tonnes over its life. If it moves 200,000 tonnes in the 2025 financial year, the company depreciates 20% of the asset’s cost (less salvage value) that year.
• Manufacturing: A bottling machine with a lifespan of 10 million bottles. If it produces 1.5 million bottles in 2025, the company can claim 15% of its depreciable base that year.
• Transport: A delivery van estimated to cover 300,000 kilometres. If it travels 60,000 km in 2025, the depreciation expense is proportionate to that usage.

The key advantage? Your profit and loss statement reflects the true economic impact of asset usage, making it easier to assess operational efficiency and plan replacements. This is particularly relevant for businesses seeking external investment or dealing with fluctuating production schedules.

How to Implement UoP in Your Business

Thinking about switching to the Unit of Production method? Here’s what to consider:

1. Identify Eligible Assets: Focus on assets where usage varies year to year and can be reliably measured.
2. Set Accurate Estimates: Work with operational teams to estimate total productive units or usage over the asset’s life.
3. Invest in Tracking: Use digital counters, telematics, or ERP systems to log usage data—ATO compliance in 2025 demands precision.
4. Update Your Accounting Policies: Ensure your financial team and external accountants are aligned with the new depreciation schedules.

Remember, you can only change depreciation methods for an asset under specific circumstances, so plan carefully and document your rationale.

Conclusion

With economic headwinds and tighter regulatory oversight in 2025, the Unit of Production method offers Australian businesses a way to align depreciation with reality—potentially unlocking cash flow and improving the accuracy of financial statements. Whether you’re in mining, manufacturing, or logistics, UoP could be the strategic edge your business needs this year.