Prime Cost or Diminishing Value … for Commercial Property?

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Senior man being puzzled with tax documents

THE AUSTRALIAN Taxation Office (ATO) allows investors to choose between two alternative methods of claiming depreciation on plant and equipment assets. The diminishing value and the prime cost methods of depreciation.

When you make a depreciation claim, you can only choose one of these methods. It is important for you to understand how your choice will affect your investment returns.

Which Method is the Best?

Both the diminishing value and the prime cost methods claim the total depreciation value available over the life of a property.

The two methods, however, use different formulas to calculate depreciation deductions. The result for you is two possible short and long term cash flow positions.

Diminishing Value

Under the diminishing value method, the deduction is calculated as a percentage of the balance you have left to deduct. The formula a Quantity Surveyor will use to calculate depreciation using the diminishing value method is shown below.

PrimeCost-1

If an investor claims using the diminishing value method, they claim a greater proportion of the assets cost in the earlier years of the effective life of the asset in compliance with the ATO.

Therefore, they receive greater deductions in the earlier years of owning the property.

Prime Cost

Under the prime cost method, the deduction for each year is calculated as a percentage of the cost. A Quantity Surveyor will use the following formula to determine the amount of depreciation deduction using the prime cost method.

PrimeCost-2

The prime cost method allows the you to claim a lower but more constant proportion of the available deductions over a longer period.

Bottom Line: You should consider your own investment strategy when deciding which method is the best for you. Regardless of the strategy, we recommend you speak to an Accountant before making a decision.

A specialist Quantity Surveyor can provide a Capital Allowance and Tax Depreciation Schedule. It shows you a comparison of the depreciation deductions of each method.

For more information on property depreciation check out this quick Q&A video.

Beer

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