Raise Commercial Property Cash Flows Now, or Later

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THE AUSTRALIAN Taxation Office (ATO) allows you, as a Commercial property owner, to choose between two methods of claiming depreciation on the fixtures and fittings within your investment properties.

These are the Diminishing Value and the Prime Cost methods of depreciation.

The Two Methods of Depreciation

Every Commercial property owner is likely to have a different investment strategy. So it is important for them to understand how their choice of depreciation method will affect their cash flow.

The Diminishing Value and Prime Cost methods both claim the total depreciation Value available over the life of a property.

However, the two methods use different formulas to calculate depreciation deductions. Which means different short and long term cash flow positions for you, as the property owner.

Legislation allows Commercial property owners who use the Diminishing Value method to increase the rate you can depreciate an asset … and therefore, increase your deductions sooner.

This method calculates the depreciation based upon the reduced written down Value remaining — and therefore, your deduction diminishes over time.

The Prime Cost method uses a lower percentage rate of depreciation and results in a consistent deduction each year, spreading your deductions more evenly over time.

An Interesting Comparison

To investigate how the outcome varies over a five, ten and fifteen year period for both methods — BMT Tax Depreciation analysed the commercial tax depreciation schedules of a sample of properties, which contained assets totalling $86,218 in Value.

The following plant and equipment table shows a comparison of the depreciation claimed over time in five year blocks as they accumulate.


The analysis found that Commercial property owners who chose the Diminishing Value method had claimed 69.58% of the depreciation available in the first five years.

By comparison, 42.25% of the depreciation available had been claimed by owners who chose the Prime Cost method over the same period.

At the 10-year point, Commercial property owners who chose the Diminishing Value method had claimed 88.33% of the deductions available. While owners who chose the Prime Cost method had only claimed 76.63% of the total deductions available.

After fifteen years, owners using each method had claimed almost all the deductions available. In other words, 95.06% of deductions claimed using the Diminishing Value method; and 95.25% using the Prime Cost method.

The remaining depreciation claim, of $4,263 for the Diminishing Value method or $4,094 from the Prime Cost method after fifteen years, would be claimed over the balance of the life of the property.

As the example shows, owners who chose the Diminishing Value method claim greater depreciation deductions in the earlier years of owning the property.

From the sample, you can see $59,990 in depreciation deductions were claimed using this method by comparison to $39,014 using the Prime Cost method in the first five years.

Which Method is the Best?

If you only plan on holding a property for a short period of time, you wish to build your investment portfolio quickly or you want to save quickly to budget for a renovation to the property — you might prefer the Diminishing Value method.

Alternatively, if you prefer to your claim deductions at a more constant rate over a longer period of time … you should choose the Prime Cost method of depreciation.

As you can see in the example, you can claim higher deductions in the 11-to-15 year period. For this period, the total claim using the Prime Cost method was $16,051 compared with only $5,797 using the Diminishing Value method.

BOTTOM LINE: A Commercial property owner can only use one method to claim depreciation deductions. Once an owner chooses the depreciation method used for an asset, it cannot be changed.

You should always discuss your situation with a professional accountant and a quantity surveyor. They will help you find the highest possible deductions for each of the two methods.


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