Two methods can be applied when depreciating plant and equipment, the Diminishing Value (DV) and Prime Cost (PC) method. The intentions of the property investor and their individual financial situation will determine which depreciation method will be most suitable for them.

Under the Prime Cost method the deduction for each year is calculated as a percentage of the opening cost. The formula for determining the depreciation deduction under the prime cost method is:

The Diminishing Value method deduction is calculated as a percentage of the balance you have left to deduct. Until recently the formula for calculating depreciation using the diminishing value method was:

Federal Budget Review

The recent Federal Budget announced that for eligible assets acquired on or after May 10th 2006, the diminishing value rate used to calculate depreciation would be increased to 200% of the prime cost rate (previously 150%). The revised calculating formula is:

How this change may affect an investor

On average this change will increase the rate of depreciation by 33%. Specifically, when BMT & ASSOC reassessed 185 capital allowance and tax depreciation reports and compared the previous legislation calculation to the new legislation, it was determined that the following further benefit existed (on average):

• • First Full Year Claim Increase: $933
• • Cumulative (Years 1-5) Increase: $2187

Therefore, any property investor whose settlement date is on or after 10th May 2006 should ensure that their depreciation claim has been calculated at the new rate, ensuring the maximum benefit obtainable is achieved.