Diminishing Value vs. Prime Cost Method

So, you’ve received your depreciation schedule – now you have a choice to make. Should you choose to claim the Diminishing Value method, or the Prime Cost method?

Both methods are based upon the effective life of the asset – i.e. how long it will last.

 

Diminishing Value Method

The DV method depreciates items more quickly up front. This method recognises the fact that most plant and equipment items lose a higher portion of their value early on.

The decline in the value of the item gets progressively smaller over time on the way towards $0.

For example: if the carpet you bought has a value of $1000 and a 10 year effective life, you would calculate the depreciation as follows:

        Year 1: $1,000 x 20% = $200

        Year 2: ($1,000 – $200) = $800 x 20% = $160

        Year 3: ($1,000 – $200 – $160) = $640 x 20% = $128

And so on and so on.

When should I use this method?

Property investors tend to use the DV method when they want their deductions up front. As they say, a dollar today is worth more than a dollar tomorrow.

 

Prime Cost Method

This method allows you to evenly spread out how much you can claim each year.

For instance, with the Prime Cost method, carpet purchased for $1000 (with an effective life of 10 years) can be claimed at 10% per annum, or $100 per year.

When should I use this method?

This may suit someone, for instance, who bought the property then lived in it for a few years before turning it into a rental property.

Or perhaps someone with little to no income in the next few financial years, and wants to have greater claims available when they start earning a higher income and enter a higher tax bracket.

By slowing down the claim, you will not miss out on as many deductions.

 

*Remember, once you choose your method of depreciation, you cannot alternate between the two.

That’s why we always recommend you talk to your financial advisor as to which method suits your individual circumstances.

About Tyron Hyde

Tyron Hyde is a director of quantity surveying firm Washington Brown. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences. -