There are two depreciation methods to calculate depreciation on plant and equipment in an investment property –the diminishing value method and the prime cost method.
When an investor makes their claim, they can choose only one of these depreciation methods, so it is important for them to understand how this choice will affect their investment returns.
Both the diminishing value and the prime cost methods claim the total depreciation value available over the life of a property. However, the two methods use different formulas to calculate depreciation deductions, achieving different short and long-term cash flow positions for the property investor. key differences are:
- Under the diminishing value method, the deduction is calculated as a percentage of the balance you have left to deduct
- This method returns higher depreciation deductions in the first few years of ownership of the property
- It uses low-value and low-cost pooling to increase the claim on items under $1,000
- It allows investors to claim 100 per cent of the value of items worth less than $300
- It decreases in value each year, so depreciation claims drop, until assets run out (or are round down to zero)
- Under the prime cost method, the deduction for each year is calculated as a percentage of the cost
- This method returns a straight-line depreciation amount until the full value of assets are claimed
- It returns greater deductions in the latter years of the depreciation schedule
- It allows investors to rely on a more consistent depreciation claim each year
- It is suitable for investors looking to maximise their depreciation claim in later years
Both depreciation methods claim the same total value over forty years. However, they use different rules to achieve either aggressive upfront claims or a more consistent claim each year.
If an investor makes their claim using the diminishing value method, they are claiming a greater proportion of the asset’s cost in the earlier years of the effective life of the asset as set by the ATO, therefore receiving greater deductions in the earlier years of owning the property. Alternatively, by selecting the prime cost method the investor is claiming a lower but more constant proportion of the available deductions over a longer period.
No matter what strategy an investor has, it is recommended they seek advice from an Accountant when deciding about which depreciation method to choose. specialist Quantity Surveyor will always be able to provide a capital allowance and tax depreciation schedule that outlines the depreciation deductions available to claim using both methods for comparison.
*Under legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th of November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on the 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand-new property will still be able to claim depreciation as they were previously.
To learn more, visit the BMT Tax Depreciation website or read BMT’s comprehensive White Paper. Alternatively, for obligation free advice contact the expert team at BMT Tax Depreciation on 1300 728 726.